EMBEDDEDNESS IN SUPPLY CHAINS: AN INTEGRATIVE VIEW OF RESOURCE DEPENDENCE THEORY AND SOCIAL NETWORK THEORY
Master thesis, MScBA, specialization Strategic Innovation Management University of Groningen, Faculty of Economics and Business
June 22, 2015
RADOVAN BRLIŤ Student number: s2737000
Riouwstraat 26a 9715 BW Groningen e-mail: r.brlit@student.rug.nl
Supervisor dr. J.D. van der Bij
Co-Assessor P.M.M. de Faria
Abstract: Companies are rarely resource self-sufficient and often create interfirm partnerships in order to access critical resources essential to their survival. This study examines how the partners in supply chains interact in order to achieve their goals, represented by customer satisfaction. The author takes an integrative view of re- source dependence theory and social network theory, combining the relational context as well as the relational content to fully understand the knowledge transfer and the power distribution between the partners. The issue is studied on an unusual sample of 88 supply chains, each consisting of a focal firm, a key supplier, and a key cus- tomer. The results indicate that the supplier’s innovativeness greatly influences the innovativeness of the focal firm, which, in turn, influences customer satisfaction, pointing to the importance of suppliers in achieving firm goals. Additionally, the results suggest that the studied mechanisms of resource dependence theory are condi- tional and depend on the nature of the relationship between partners. Therefore, the findings of the research underscore the importance of the social aspect of relationships and suggest that only the integration of the two theories allows for a fuller understanding of interorganizational relationships.
Keywords: corporate social responsibility, embeddedness, innovativeness, market orientation, resource dependence theory, social network theory, supply chain
Acknowledgements: I would like to thank my supervisor dr. J.D. van der Bij for the time he spent explaining the statistical procedures, his guidance of my research as well as many helpful comments resulting in great im- provements of my work. Moreover, I am grateful to Mirjam Kibbeling, Hans van der Bij, and Arjan van Weele for permitting me to analyze their database.
Word Count: 14 483
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Introduction
Companies have rarely control over all critical resources they need to succeed. With the recent in- crease of the importance to focus on core competences (see Prahalad & Hamel, 1990), the dependence of companies on the resources of their partners increases even more. Nowadays, companies not only have to manage the internal resources, but the resources outside the firms’ boundaries as well. That means, that market orientation, corporate social responsibility, and innovativeness, concepts previously considered to be endogenous to companies (Kibbeling, Van der Bij, & Van Weele, 2013), now extend to external part- ners and supply chains.
The concepts of market orientation and corporate social responsibility, however, are scarcely stud- ied in the supply chain context. Only few studies have examined the effects of market orientation (e.g.
Martin & Grbac, 2003; Min, Mentzer, & Ladd, 2007; Siguaw, Simpson, & Baker, 1998) and corporate social responsibility (e.g. Awaysheh & Klassen, 2010; Carter & Jennings, 2002) on supply-chain partners.
Innovativeness in supply chain context has received even less attention (Kibbeling et al., 2013).
This study, therefore, aims to address this literature gap by examining the interactions between supply chain partners regarding market orientation, corporate social responsibility, and innovativeness.
Additionally, the impact of the interactions on the end-user satisfaction, as an overall evaluation of a firm’s products and services (Hsieh, Chiu, & Hsu, 2008), is studied. This leads to the first research question:
RQ1: How do partners in supply chains influence each other in order to achieve end-user satisfaction through market orientation, corporate social responsibility and innovativeness?
Since the context of this study surpasses a single firm’s boundaries, resource dependence theory is used to explain the relationships. The theory builds on the notion that companies are rarely self-contained in achieving their goals and explains the interorganizational relationships by the exclusivity of resources controlled by certain organizations (Pfeffer & Salancik, 1978). The resource dependence theory maintains that the survival of organizations is determined by their ability to access resources externally (Casciaro &
Piskorski, 2005; Pfeffer & Salancik, 1978).
Additionally, the theory posits that the dependence of one partner is the source of the power of the other partner (Emerson, 1962). As one partner is dependent on the resources of its supplier as well as the supplier’s survival is dependent on its ability to satisfy the partner, the Emerson’s (1962) explanation of power and dependence proposes a mutual interdependence among partners. Two mechanisms arise from the mutual dependence – resource dependence and downstream power (Kibbeling et al., 2013). Their im- pact on the information flows and the power distribution among the partners is studied in this research.
The issue of resource dependence has not yet been studied in the context of supply chains, except the study of Kibbeling et al. (2013). Moreover, the mechanics of resource dependence theory are scarcely studied from both sides of the relationships (e.g. Casciaro & Piskorski, 2005). Additionally, as Pfeffer and Salancik propose, resource dependence theory “is not as rigorously explored and tested as it might be”
(2003, p. xxiii). This study, thus, seeks to address the gaps by answering the second research question:
2 RQ2: How do the resource dependence and the downstream power in supply chains influence the infor-
mation transfer and the willingness of partners to comply with the other party’s requirements?
Resource dependence theory, however, takes a rather narrow view on interfirm ties and has been criticized and argued to be merely an appealing metaphor in organizational discourse (Casciaro &
Piskorski, 2005). Therefore, in this research, I take an integrative view on the issue by applying both re- source dependence theory and social network theory (Granovetter, 1985; Gulati, Nohria, & Zaheer, 2000;
Uzzi, 1997). The latter offers a different view on the interfirm relationships and maintains that the deci- sions companies make can be fully understood only by examining the social networks in which companies are embedded (Gulati et al., 2000). Thus, while resource dependence theory studies the partners and the resources they own – the relational content – social network theory examines the properties of the ties be- tween the partners – the relational context (Rowley, 1997).
Accordingly, the social network theory proposes, that a tie between two partners can be either strong or weak (Granovetter, 1973). The strength of the relationship influences the nature of the coopera- tion and the type of information and knowledge transferred (Granovetter, 1983; Uzzi, 1997). The relation- al context, therefore, has a considerable impact on the cooperation between partners. However, only few studies, if any, have examined the effects of the strength of the ties between partners in the supply chain context. This research attempts to address this research gap by answering the third research question:
RQ3: How does the strength of the tie between partners influence the information transfer, the willingness of partners to comply with the other party’s requirements, and the power distribution in supply chain setting?
By answering the research questions, I seek to make several theoretical contributions. First, I aim to contribute to the resource dependence theory by examining the resource dependence and downstream power mechanisms in the context of supply chains and I seek to extend the understanding of the mecha- nisms by their examination from both sides of the relationship. Second, I intend to contribute to the social network theory by examining the effect of the strength of the ties between two partners in the supply chain context. Third, I aim to contribute to both theories by integrating them in order to understand and explain the partner relationships and mechanics within supply chains. Finally, I study the interaction between the market orientation, corporate social responsibility, and innovativeness, rarely examined in the field of sup- ply chain management, hence I seek to contribute to the evolving theory of supply chain management (see Chen & Paulraj, 2004). Additionally, this research aims to make a contribution to managerial practice as well. The research provides an explanation on how suppliers enable companies to achieve customer satis- faction. Moreover, the research examines the power distribution within supply chain and the consequences on firm performance. Finally, the research proposes the effects of building strong relationships with part- ners on the market orientation, corporate social responsibility, and innovativeness of both partners, and, eventually, the customer satisfaction.
This work is structured as follows. It begins with the theoretical framework of the research, con-
taining literature reviews in the fields of resource dependence theory and social network theory. Next, the
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conceptual framework of the research, integrating both theories, is provided. Drawing on the theoretical and conceptual frameworks a set of hypotheses is derived. Subsequently, methodology section offers an explanation on the measurements and statistical methods used. Finally, the work concludes with the discus- sion of the results and the implications both for theory and for practice.
Theoretical Background
Resource Dependence Theory
With their influential book The External Control of Organizations (1978), Pfeffer and Salancik created what was later labeled as resource dependence theory and praised as “one of the most influential theories in organizational theory and strategic management” (Hillman, Withers, & Collins, 2009, p. 1404). The authors have synthesized previous ideas about interorganizational interdependencies (Drees & Heugens, 2013) and created the underlying notion of the theory that the survival of an organization is determined by its ability to acquire critical resources from external sources (Casciaro & Piskorski, 2005; Kibbeling et al., 2013; Pfeffer & Salancik, 1978). Scholars in this field argue that strategic options of companies are con- strained by the requirements from the external environment (Christensen & Bower, 1996). Therefore, companies survive only when they are able to adjust to and cope with the environment (Pfeffer & Salancik, 1978). However, as Pfeffer and Salancik (1978) argue, such adjustments require understanding of the envi- ronmental context and the relationship between the environment and the organization.
Additionally, based on the fundamental principles of the theory, it explains the interdependence and power distribution among partners. Deriving from Emerson’s (1962) work, resource dependence theo- ry proposes that the source of the power of an organization over its partner is based on the control of re- sources not available from other sources (Davis & Cobb, 2010). The organization, thus, has power over the partner to a degree the partner is dependent on the organization.
Finally, the theory maintains that the need to access resources outside the organization’s bounda- ries explains the formation of interorganizational arrangements (Drees & Heugens, 2013). In order to suc- ceed, companies depend on the resources of their suppliers and create ties that allow them to access the resources (Kibbeling et al., 2013).
Social Network Theory and Embeddedness
Social network theory develops the importance of inter-firm relationships for firm performance even further. According to the theory, external ties not only allow firms to access valuable, rare, inimitable and non-substitutable resources (for an explanation of the importance of such resources see Barney, 1991) but the ties are viewed as such resources themselves (Gulati et al., 2000). Social network theory further pro- poses that the behavior of companies can be fully understood only by examining social networks in which companies are embedded (Gulati et al., 2000).
The research in social network field has experienced a boom in the second half of 20
thcentury and
the number of publications in the field has risen exponentially ever since (Borgatti & Foster, 2003). Moreo-
ver, social network theory has been applied in many areas of organizational research. Thus, while in 1995
4 Salancik (1995) might have rightfully criticized network research for not being theoretical, Borgatti and Foster (2003) argue that such criticism is not actual anymore. Over the past thirty years, the theory has evolved into a variety of research streams and one of the most prominent streams, also important for this research, focuses on embeddedness (Granovetter, 1973, 1983, 1985).
Embeddedness. The concept of embeddedness has gained attention of scholars after the initial discussion of the concept by Granovetter (1973). In his formulation, Grannovetter (1973) argued that all economic behavior is embedded in social relationships between actors and that economic actions can be explained by the nature of the relationships. The subsequent research in this area examines the nature of ties between two or multiple social actors (e.g. Frenzen & Nakamoto, 1993) and scholars generally classify the ties as weak or as strong, where strong ties contain higher levels of closeness, reciprocity and indebted- ness (Granovetter, 1985). Although scholars initially applied tie strength on relationships between individu- als (e.g. Granovetter, 1985), a growing number of researchers apply the concept in organizational and inter-organizational settings (Rindfleisch & Moorman, 2001). More recent research focuses on the effect of strong – or embedded – ties on firm performance (Uzzi, 1996, 1997). Additionally, researchers have found that embedded ties have positive impact on the cost of capital (Uzzi, 1999), and client relations (Baker, Faulkner, & Fisher, 1998) and influence the choice of alliance partners (Gulati & Gargiulo, 1999), and con- sumer purchasing decisions (DiMaggio & Louch, 1998). Although strong ties are generally believed to have positive effects on companies, mainly through the sharing of sensitive information between actors (Rindfleisch & Moorman, 2001), Uzzi (1997) has proposed the ‘paradox of embeddedness’, pointing out the negative side of embedded relationships. According to this paradox, the negative impact of an exit of a partner from the social network is much more severe if the network depends on embedded relationships, possibly leading to extinction of the whole network (Uzzi, 1997). Additionally, Uzzi (1996) has found that the risk of a firm’s failure is higher if the firm depends only on embedded relationships compared than if it maintains a combination of embedded and weak – or arm’s-length – relationships.
Conceptual Framework
As discussed earlier, both resource dependence theory and social network theory study interfirm relationships, however, neither of them provides the full understanding of the relations. Although resource dependence theory sheds light on the creation of ties and provides explanation of relationships based on the distribution and the exclusivity of resources owned by the partners (Casciaro & Piskorski, 2005; Pfeffer
& Salancik, 1978), a drawback of the theory is that “it assumes an atomistic environment in which infor- mation about other organizations is widely available and freely accessible to all” (Gulati, Dialdin, & Wang, 2002, p. 282). On the other hand, social network theory introduces a social point of view and studies the properties of the relationship and the effect of the properties on firm performance (Granovetter, 1985;
Uzzi, 1997) and explains why information is not evenly distributed in the environment. Therefore, social
network theory has a potential to support resource dependence theory and to extend the understanding of
interorganizational relationships, since it recognizes that control over resources is not the only source of
power (Salancik, 1995). The integration of the theories, thus, combines the “relational content — the pow-
er / dependence flowing across relationships” (Rowley, 1997, p. 907) of resource dependence theory and
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the “relational context — the structure of relationships” (Rowley, 1997, p. 907) of social network theory to fully understand the decisions, relationships, information transfer and interdependencies between compa- nies. The conceptual framework integrates both theories and studies this issue from the point of view of both the focal firm and its key supplier and examines the effects from the end-user’s point of view (see Fig- ure 1). The framework builds on the notion of Pfeffer and Salancik (1978), that companies have to under- stand their environmental context first and then react to it in order to succeed. As the environment consists not only from customers, although playing an important role, but other stakeholders as well, the conceptual framework considers two essential constructs, allowing companies to gather information about the envi- ronment – end-user orientation, and CSR orientation. Further, the innovativeness of a company is consid- ered to be crucial to the firm’s ability to react to the environmental contexts and, therefore, it is included in the model. The view of social network theory is then represented by the degree of embeddedness. Finally, customer satisfaction is deemed to be an important indicator of firm performance (Pfeffer & Salancik, 1978). The key constructs of the conceptual model are discussed in more detail below and the relationships between the constructs are introduced in the research hypotheses section.
End-user orientation. Resource dependence theory maintains that the survival of companies depends on the external contingencies to which the companies have to adapt (Pfeffer & Salancik, 1978).
Market orientation, enabling firms to monitor the contingencies arising from market, thus, plays an im- portant role in the survival of the firms. I derive end-user orientation from the concept of market orienta- tion, which originates from the marketing concept (see Kotler, 2002). Since the introduction of the concept,
Figure 1. Conceptual framework
6 market orientation literature has evolved into two streams – the first considers market orientation as an attribute of organizational culture (see Narver & Slater, 1990), while the second defines the concept as a behavioral process (see Kohli & Jaworski, 1990). In this research, I view market orientation as a combina- tion of both approaches – a cultural attribute resulting in certain behavioral processes. Therefore, I employ the definition of Deshpandé and Farley (1998) who define market orientation as “the set of cross-functional processes and activities directed at creating and satisfying customers through continuous needs-assessment”
(p. 226). For the purposes of the research, the customer of the focal firm is considered to be the target end- user both for the supplier and the focal firm.
CSR orientation. Similarly to market orientation, corporate social responsibility (CSR) plays an important role in controlling the external contingencies, on which companies depend (Pfeffer & Salancik, 1978). CSR has been defined numerous times, however, the basic notion of the concept seems to be shared among the definitions (Han, Kim, & Srivastava, 1998). It can be understood from the definition of McWilliams, Siegel, and Wright (2005), viewing CSR as “situations where the firm goes beyond compli- ance and engages in actions that appear to further some social good, beyond the interests of the firm and that which is required by law” (p. 1). The construct of CSR orientation builds on this view and for the pur- poses of this research is defined as “a set of cross-functional processes and activities directed at continuously identifying and embedding environmental, social and ethical needs in business processes” (adapted from Deshpandé & Farley, 1998). CSR orientation, thus, enables keeping track of the contingencies arising from important stakeholders in a firm’s environment.
Innovativeness. Although monitoring the external contingencies is crucial to the survival of a company, a reaction and adaptation to the contingencies is necessary in order to succeed (Pfeffer &
Salancik, 1978). Therefore, the ability of a company to change and to adjust to the external environment is essential. In this research, the ability is represented by innovativeness. The term innovativeness can refer to products and services as well as individuals or organizations. In order to be in alignment with the resource dependence theory, innovativeness is viewed on the level of organizational culture, consistent with end-user orientation and CSR orientation. Thus, innovativeness is defined as “the notion of openness to new ideas as an aspect of a firm’s culture” (Hurley & Hult, 1998, p. 44).
Customer satisfaction. Resource dependence theory views customer satisfaction as one of the most important goals of companies (Kibbeling et al., 2013; Pfeffer & Salancik, 1978) and, therefore, it is used as the dependent variable of the conceptual model. Customer satisfaction is defined as “satisfaction that accumulates across a series of transactions of service encounters” (Kibbeling et al., 2013). In the extant literature, various determinants of customer satisfaction have been studied – expectations, disconfirmation of expectations, performance, affect, and equity (Szymanski & Henard, 2001). In this research, disconfir- mation theory (see Oliver & Desarbo, 1988; Oliver, 1980) is used to explain customer satisfaction, suggest- ing that customer satisfaction could be described as the difference – either positive, neutral, or negative – between the actual performance of a product or service and the expectations of customers (Szymanski &
Henard, 2001).
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Degree of embeddedness. Following social network theory and the theory of embeddedness (Granovetter, 1983; Uzzi, 1997), the strength of the relationship between two actors influences the infor- mation transferred, degree of reciprocity, and the preferred approach to problem solving between the partners. The strength of a relationship can range from weak ties to strong ties, or using the terminology of Uzzi (1997), from arm’s-length ties to embedded ties. In this research, the strength of the relationship be- tween the focal firm and the supplier is represented by the degree of embeddedness (Uzzi, 1997), which considers the trust and willingness to take a risk by making the first step in the relationship.
Research Hypotheses
Resource Dependence Theory
End-user orientation and CSR orientation. To understand the conceptual model, it is first necessary to explain the relationships within the company boundaries. As the resource dependence theory maintains, companies operate under constraints from the external environment and have to adapt to the external contingencies in order to survive (Casciaro & Piskorski, 2005; Christensen & Bower, 1996; Pfeffer
& Salancik, 1978). Therefore, it is essential for the survival of the companies that they monitor the envi- ronment in which they operate. Two attributes of company culture – end-user orientation and CSR orien- tation – enabling a better understanding of the external contingencies are discussed below.
As argued earlier the monitoring of the external environment is critical to the survival of a compa- ny. Moreover, resource dependence theory proposes that the success of a company is determined by its ability to satisfy its customers (Pfeffer & Salancik, 1978). Therefore, it is essential for companies to know the demands of their customers (Christensen & Bower, 1996), who are an important part of the external envi- ronment. End-user orientation helps companies to identify and understand the needs of the customers (Kibbeling et al., 2013). Accordingly, Kohli an Jaworski (1990) suggest that end-user orientation is a frame- work consisting of three steps – intelligence generation, dissemination, and responsiveness. Thus, compa- nies oriented on the end-user make sense of the environment in order to meet the needs of the customers, disseminate the information inside the organization and respond to it accordingly.
In recent years, however, the focus shifted from merely the customers to the society as a whole and the importance of the CSR started to rise (Han et al., 1998; McWilliams et al., 2005). As defined earlier, CSR means meeting the needs of society and the environment (McWilliams et al., 2005), hence broadening the scope of attention to the whole external environment. Therefore, companies that are oriented on CSR have to make sense of the environment (see Teece, 2007) in order to identify the needs they have to satisfy, disseminate the information within the company and act upon the information (Kohli & Jaworski, 1990).
Therefore, companies that are end-user-oriented already have the capabilities, making it easier for them to
focus on CSR orientation. Moreover, as the end-users are a part of the society, the information and
knowledge obtained through scanning the environment to meet end-user needs can be used for meeting
the CSR needs as well.
8 Finally, as there is an increasing number of consumers preferring suppliers that engage in CSR ac- tivities (Han et al., 1998), CSR practices might be a great tool to enable meeting customer needs, suggesting an overlap between end-user orientation and CSR orientation (Porter & Kramer, 2006). Therefore, com- panies that aim to meet the demands of their customers will increase their engagement in CSR activities.
Following the line of reasoning presented in the paragraphs above, I argue that end-user orienta- tion creates the basis for companies to effectively engage in CSR activities and hypothesize:
H1a: Focal firm’s end-user orientation is positively associated with its CSR orientation.
H1b: Supplier’s end-user orientation is positively associated with its CSR orientation.
External orientation and innovativeness. According to Narver and Slater (1990) the culture of end-user-oriented companies places a high importance on creating customer value and responding to market information. In accordance with this view, Kohli and Jaworski (1990) argue that end-user-oriented companies are more open to external sources of information and knowledge. Therefore, it can be implied that the culture of end-user-oriented companies fosters the inflow of external knowledge and information from the environment. However, resource dependence theory argues that monitoring the environment is not sufficient unless companies adapt to the environment (Christensen & Bower, 1996; Pfeffer & Salancik, 1978). Therefore, the information about the environment has to be translated into action, which requires an integration with larger planning and decision-making processes and requires adaptation of products, services, and processes in order to continually meet changing customer demands (Hult, Hurley, & Knight, 2004). Due to the tight link between gathering the information and acting on the information, in end-user- oriented organizations, continuous innovation stems from simply being market oriented (Han et al., 1998;
Hult et al., 2004). Therefore, end-user orientation, driving the continuous effort to meet customer needs (Kirca, Jayachandran, & Bearden, 2005), implicates finding new ways to solve problems and can be viewed as innovative behavior itself (Jaworski & Kohli, 1993).
Furthermore, extant literature emphasizes the role of innovativeness in the end-user orientation – performance relationship (e.g. Narver & Slater, 1994; Zaltman, Duncan, & Holbek, 1973). Therefore, in- novativeness not only arises from end-user orientation, it is an essential link between end-user orientation and firm performance (Slater & Narver, 1995). Its absence would leave end-user orientation incomplete (Hult et al., 2004). Thus, as Deshpandé, Farley and Webster (1993) argue there is a strong linkage between monitoring the external environment and adaptation to it in achieving superior firm performance. This fact further increases the incentives for end-user-oriented companies to be innovative.
Based on the arguments presented here, I hypothesize:
H2a: Focal firm’s end-user orientation is positively associated with its innovativeness.
H2b: Supplier’s end-user orientation is positively associated with its innovativeness.
On a similar note, CSR activities enable companies to build more and deeper relationships with
various stakeholders, facilitating intensive exchange of knowledge and resources, which complement inter-
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nal knowledge (Luo & Du, 2014). CSR initiatives allow for development of strong stakeholder relationship networks, including customers, investors, or employees (Sen, Bhattacharya, & Korschun, 2006). Such strong relationships, in turn, increase the willingness of the stakeholders to share not only internal knowledge and resources, but knowledge and resources from their networks as well (Jansen, Van Den Bosch, & Volberda, 2006; Tsai & Ghoshal, 1998). This interaction allows a better understanding of the environment and, as Luo and Du (2014) argue, access to such knowledge and resources drives the innova- tiveness of a company.
Moreover, as argued earlier, similarly to end-user orientation, CSR orientation implies doing things differently and requires substantial adjustments to the environmental contingencies (Sirmon, Hitt, &
Ireland, 2007). Following the argumentation for end-user orientation, CSR orientation itself could be con- sidered an innovative behavior (Han et al., 1998; Hult et al., 2004; Jaworski & Kohli, 1993). Furthermore, based on the arguments of Hult et al. (2004) and Slater and Narver (1995), without the ability to translate information into valuable outcomes through the continuous adjustments (Sirmon et al., 2007), CSR orienta- tion would be incomplete and CSR activities would not bring any positive effects. Therefore, as CSR ori- entation requires to continually meet the societal needs (Bansal, 2005) and as innovativeness is essential to meeting this goal, it can be argued that CSR orientation fosters innovativeness (Han et al., 1998; Kirca et al., 2005).
Following the argumentation above, I hypothesize:
H3a: Focal firm’s CSR orientation is positively associated with its innovativeness.
H3b: Supplier’s CSR orientation is positively associated with its innovativeness.
Innovativeness and customer satisfaction. As resource dependence theory maintains, the ability of a company to satisfy its customers is critical to its success (Pfeffer & Salancik, 1978) and, thus, the company’s activities should lead to this goal. Customer satisfaction can be explained by customer expecta- tions and actual performance of the product disconfirming the expectations (for disconfirmation theory see Oliver, 1980). When the actual performance exceeds the expectations of customers, they are satisfied and, conversely, when the performance does not meet the expectations, customers are dissatisfied (Oliver &
Desarbo, 1988; Oliver, 1980; Szymanski & Henard, 2001). Continually satisfying customers, hence surpas- sing the expectations, requires finding new ways to bring additional customer value. However, companies, seldom being resource-independent (Casciaro & Piskorski, 2005; Pfeffer & Salancik, 1978), have to rely on external resources in order to increase the customer value they offer. Since innovativeness enables compa- nies to translate the external knowledge and resources into better products or services (Hult et al., 2004;
Slater & Narver, 1995) and to introduce products that better serve current and future customer needs
(Hurley & Hult, 1998; Menguc & Auh, 2006), it results in offering higher value for customers (Sirmon et al.,
2007). Therefore, the more innovative the company is, the better it can exploit the information and re-
sources it obtains from external sources, as well as internal knowledge to increase customer value, resulting
in a positive impact on the satisfaction of its customers.
10 Although customers deal directly with the firm bringing the products on market, additional value does not necessarily originate solely from within the company. As companies are dependent on external resources (Casciaro & Piskorski, 2005; Kibbeling et al., 2013; Pfeffer & Salancik, 1978), customer value may, possibly, be embedded in the resources, that flow into the company (e.g. innovative materials). In that case, innovativeness at the focal firm’s side is not required and the increased customer value arises directly from the supplier’s innovativeness. Hence I propose two hypotheses:
H4a: Focal firm’s innovativeness is positively associated with the end-user’s satisfaction.
H4b: Supplier’s innovativeness is positively associated with the end-user’s satisfaction.
Resource dependence. Based on the Emerson’s (1962) proposition about power and depend- ence, two main mechanisms can be observed in resource dependence theory that influence firm behavior – a firm’s dependence on the resources of its supplier and the downstream power of customers (Kibbeling et al., 2013).
As organizations rely on resources and capabilities from outside of the companies’ boundaries to survive and succeed on markets (Casciaro & Piskorski, 2005; Kibbeling et al., 2013; Pfeffer & Salancik, 1978), they require external resources in order to satisfy evolving needs of their customers as well. Contin- uous satisfaction of the changing customer needs requires adaptation of products and services (Hult et al., 2004) and, therefore, a certain degree of innovativeness. Accordingly, following the resource dependence theory (see Casciaro & Piskorski, 2005; Pfeffer & Salancik, 1978), companies would depend on the innova- tiveness of their suppliers in order to satisfy their own customers. Therefore, the more innovative supplier the more innovative ideas flow through a knowledge and information transfer within the supply chains (Cheng, Yeh, & Tu, 2008; McLaughlin, Paton, & Macbeth, 2006; Paton & McLaughlin, 2008). However, the ideas have to be turned into an action and would not bring any value if the company would not be able to act upon them (Hult et al., 2004; Slater & Narver, 1995). Therefore, a company realizing its dependence on the innovativeness of its supplier would try to combine the supplier’s innovative ideas with its own (Lee
& Colarelli O’Connor, 2003), resulting in increased innovativeness of the company. Thus, building on the dependence of a company on the resources and capabilities of its suppliers, I hypothesize:
H5: Supplier’s innovativeness is positively associated with the focal firm’s innovativeness.
Downstream power. The second mechanism discussed earlier is the downstream power of cus- tomers. Arguably, the success of an organization is dependent on its ability to meet the demands of its cus- tomers (Christensen & Bower, 1996). Therefore, following the Emerson’s (1962) proposition, a customer has a power over the organization to the degree the organization’s success depends on the customer.
Hence, a customer is able to use this power to influence its supplier and to require of the supplier to meet certain conditions that allow the customer to meet its goals more effectively.
The importance of the downstream power is apparent in the light of resource dependence theory,
proposing that companies depend on external resources in order to succeed (Pfeffer & Salancik, 1978). As a
company aims to meet the demands of its customers, it requires resources that allow it to do so effectively.
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For the company, it is optimal if the supplier of the resources has the needs of the company’s customers in mind and incorporates the needs into the process of creation of the resources – in other words, a company would prefer suppliers that are oriented on the same market as the company itself. Correspondingly, if a company focuses on CSR activities, in order to engage in them effectively, it depends on external resources as well (Casciaro & Piskorski, 2005; Pfeffer & Salancik, 1978). Thus, as the CSR-oriented company aims to meet certain environmental needs (Bansal, 2005), it requires external resources that meet the needs as well.
Consequently, in such situations, the company would use its power over the supplier, originating from the supplier’s dependence on the company (Emerson, 1962), to require of the supplier to incorporate the cus- tomer, environmental, or societal needs into its own activities. Thus, based on the customer power, allow- ing customers to influence their suppliers, I hypothesize:
H6a: Focal firm’s end-user orientation is positively associated with the supplier’s end-user orientation.
H6b: Focal firm’s CSR orientation is positively associated with the supplier’s CSR orientation.
Embeddedness
Extending the resource dependence theory, the conceptual model integrates the theory with social network theory (Granovetter, 1973). As the latter maintains, strong ties have a positive impact on multiple aspects of a firm’s performance (Borgatti & Foster, 2003). Firstly, Uzzi (1997) argues that through arm’s- length relationships companies transfer mainly price and quantity data. On the other hand, through em- bedded ties companies transfer more tacit (see Nonaka, 1994) and proprietary knowledge (Uzzi, 1997).
This way, companies transfer sensitive knowledge, such as information on profit margins and strategy, and tacit knowledge acquired through learning by doing (Larson, 1992). Such fine-grained information has a holistic structure, which is difficult to transfer through arm’s-length ties (Uzzi, 1997). Consequently, the transfer of fine-grained information enables firms to bring products to market quickly, and to reduce errors and to identify the preferences and range of strategic options available for the partners (Uzzi, 1997).
Secondly, as embedded ties form a basis for the fine-grained information transfer, they enable joint problem solving as well (Larson, 1992). In contrast to arm’s-length ties, embedded ties warrant problem- solving mechanisms allowing for coordination of functions and solving problems quickly (Uzzi, 1997).
Moreover, for arm’s-length ties the solution for a problem is usually the exit of one of the partners (Hirschman, 1970) resulting in the absence of any feedback for either partner. On the contrary, Helper (1990) found that firms with embedded ties work together on the solution and get direct feedback, which enables learning and the discovery of new combinations.
Finally, Uzzi (1997) argues that the cooperation and reciprocity in embedded ties enable long-term investments that would not be possible through arm’s-length relationships, which are based on immediate returns. The expectation of non-contractual, non-binding actions being reciprocated in the future (Portes &
Sensenbrenner, 1993) increases the willingness of the partners to take a risk and invest in a technology re- quested by the other party.
Given that CSR orientation requires substantial adjustments (Sirmon et al., 2007), a transformation
of a company towards CSR orientation entails some investments with returns in the long-term. Therefore,
12 if a company is to make such transformation due to the requirements of its customer, it is more likely to make the long-term investment if the partners have an embedded relationship (Uzzi, 1997). In addition, CSR orientation requires of a company to know the needs of society and to act according to certain envi- ronmental regulations. The needed information and knowledge could be either learned by the company itself or transferred from a partner. However, such knowledge being often tacit and complex it could not be transferred through arm’s-length ties (Uzzi, 1997).
Comparably to CSR orientation, shifting focus from direct customers to customers more down- stream requires changes inside the organization. As a supplier decides to focus on the needs of its custom- er’s customers, the investment only pays-off if the immediate customer stays with the supplier. Therefore, the supplier will be more likely to shift its orientation and to focus on the end-user in the case of an embed- ded relationship with the immediate customer, where the possibility of a long-term partnership is higher (Uzzi, 1997). Moreover, as the supplier shifts its focus, it requires knowledge about customers with whom it does not deal directly. The necessary knowledge is, thus, one step further away and the direct customer becomes a valuable source of the knowledge, increasing the importance of knowledge transfer within the supply chain. Such knowledge being learned by the direct customer as it operates on the market is, thus, tacit (Larson, 1992), complex and proprietary. Thus, it cannot be transferred through arm’s-length ties and requires embedded ties to be transferred effectively (Uzzi, 1997).
Similarly to knowledge about customer and societal needs, innovations often contain tacit and complex knowledge (Sampson, 2007; Shrader, 2001). Consequently, the exchange of new ideas from a firm’s supplier and the successful implementation of the ideas at the firm’s side requires the transfer of fine- grained information, possible only through embedded ties (Uzzi, 1997). Furthermore, such transfer and implementation of innovations might require adaptation at the focal firm’s side. Given that embedded rela- tionships enable joint problem solving and increase the willingness of partners to seek integrative solutions to problems (Uzzi, 1997), maintaining embedded ties between the partners will increase the efficiency of the adaptation, eventually leading to a more successful implementation of the innovation. Finally, the im- plementation of an innovation might also require investments from the focal firm with returns that are not immediate. As argued earlier, companies are more willing to make such investments with partners with whom they have a strong relationship (Uzzi, 1997).
Following the line of reasoning in previous paragraphs, I offer three hypotheses:
H7a: The degree of embeddedness between the supplier and the focal firm positively moderates the relationship between the supplier's end-user orientation and the focal firm's end-user orientation.
H7b: The degree of embeddedness between the supplier and the focal firm positively moderates the relationship between the focal firm’s CSR orientation and the supplier’s CSR orientation.
H7c: The degree of embeddedness between the supplier and the focal firm positively moderates the
relationship between the supplier's innovativeness and the focal firm's innovativeness.
13
Methodology
Sample and Data Collection
In this research I analyze survey data from three parties operating in a supply chain – focal firm, key supplier and key customer.
1The respondents are typically executives from Dutch-based companies.
The executives were asked to identify one of their key suppliers and one of their key customers based on two criteria: (1) ranks among the company’s top three suppliers/customers and (2) is perceived crucial for running business operations of the company. A separate questionnaire was developed for each party and the survey follows other studies that adopted supply chain setting (Deshpandé et al., 1993; Farh, Tsui, Xin,
& Cheng, 1998; Kotabe, Martin, & Domoto, 2003; Langerak, 2001; Siguaw et al., 1998). The inclusion of key suppliers and customers rather than average increases the reliability of potential supply chain effects (Kotabe et al., 2003).
The sample contains respondents from the databases of three platforms: CSR Netherlands (MVO Nederland), VOKA Chamber of Commerce Kempen, and buyers’ cooperative INKA. Only companies involved in relationships with suppliers or business customers were contacted, resulting in a group of 582 executives. The executives were contacted via telephone and were invited to fill out the questionnaire through a web-enabled survey tool or in a digital survey format or through a digital survey format via email. The respondents were asked to provide contact details to their key suppliers and key customers. The suppliers and customers were then contacted personally and invited to fill in the questionnaire.
Of the 582 executives, 182 agreed to participate (34.5%). 125 completed questionnaires were re- ceived (68.7% of the sent questionnaires) after reminders were sent. The respondents provided contact de- tails to 98 suppliers and 95 customers (53.3% of executives receiving the questionnaire). Of the 193 contact persons from either the suppliers or the customers, 185 have returned filled questionnaires (95.9%). The final sample contains only completely matched supply chains of a supplier, a focal firm, and a customer. 88 such chains are in the final, analyzed sample (48.8% of the focal firms that received the questionnaire).
The 88 focal firms in the final sample operate in manufacturing (36 firms: 40.9%), construction (22: 25.0%), information and communication (11: 12.5%), wholesale and retail trade (7: 7.9%), administra- tive and support service activities (4: 4.5%), and other industries (8: 9.1%).
No significant differences regarding the dependent variable – customer satisfaction – were found after controlling for industry type. Additionally, the weighted average of sales volume and number of em- ployees was compared with the weighted average of Dutch industrial statistics. The comparison has shown an overrepresentation of small firms in the sample. The extrapolation method of Armstrong and Overton (1977) was used to test for possible nonresponse bias. Early and late responses were compared on customer satisfaction. The test indicated no significant differences at a 95% confidence interval.
Pretest. The original questionnaire was developed in English and subsequently translated into Dutch. This procedure allowed both Dutch and international respondents to participate. The Dutch ver- sion of the questionnaire was developed using the parallel-translation/double translation method (Adler,
1 I use the database of Kibbeling, van der Bij, and van Weele (2013). For the convenience of the reader, I describe the data- base in this section.
14 1983; Sekaran, 1983). The translation was done by two independent translators and the Dutch question- naire was, in turn, translated back to English by two other independent translators. Minor inconsistencies were discussed with all four translators.
As many measures as possible were adapted from or inspired by existing validated scales from lit- erature. The questionnaire was pretested to evaluate the adapted and translated measurement scales.
Three supply chains – three suppliers, three focal firms, and three customers – were interviewed as the pre- test. The respondents filled out the questionnaire and were encouraged to ‘think aloud’ during the process (Hunt, Sparkman Jr, & Wilcox, 1982). The interviews were recorded and supervised by two researchers.
The pretest interviews were analyzed and resulted in adaptation of the scales. The measurement scales are provided in Appendix A.
Measures
Supplier variables. End-user orientation, CSR orientation, innovativeness and the degree of embeddedness are measured at the side of the supplier. End-user orientation is measured by a five-item scale adapted from market orientation scale of Deshpandé and Farley (1998). The questions in the scale were rephrased in order to reflect the orientation on the end-user rather than the direct customer. The scale used includes items such as ‘our business activities originate from the needs of the customers of our direct customer’ or ‘we are responsive to the needs of our customer’s customers.’ CSR orientation is meas- ured by a newly developed three-item scale adapted from Deshpandé and Farley (1998). The items were adapted in order to match the main domains of CSR orientation – environmental assessment, social issue management, and ethical business behavior. The measurement items are, for example, ‘our business objec- tives include elements of corporate social responsibility’ or ‘we employ routines to decrease energy con- sumption in our daily activities.’ To measure the innovativeness, a three-item scale of Hurley and Hult (1998) is used, measuring the openness of a company to new ideas, including items such as ‘in our man- agement team we actively seek innovative ideas’ and ‘innovation is viewed in our firm as an essential ele- ment of project management.’ Finally, the social network theory construct – degree of embeddedness – is measured based on a two-item scale built on the theory of firm-level trust of Das and Teng (1998). The scale includes the following items. ‘We are willing to take the risk by taking the first step in future coopera- tion with this client’ and ‘our relationship with this client is mainly based on trust.’
Focal firm variables. At the side of the focal firm, end-user orientation, CSR orientation, inno-
vativeness as well as control variables are measured. Firstly, end-user orientation is, similarly to the suppli-
er’s variable, measured based on a three-item scale of Deshpandé and Farley (1998). However, for the focal
firm, the questions are focused on the direct customer. Secondly, CSR orientation is measured by the new-
ly developed scale used for the supplier as well. The scale for the focal firm includes seven items. Thirdly,
innovativeness is measured by a five-item scale based on Hurley and Hult (1998), as in the case of the sup-
plier. Finally, the control variables are measured by single-item scales adopted from Jaworski and Kohli
(1993). The measurement items are ‘the technology in our industry is changing rapidly’ for technology tur-
bulence, ‘our customers tend to look for new products all the time’ for market turbulence, and ‘our compe-
tition can quickly match anything we can offer’ for competitive intensity respectively.
15
Customer variable. The dependent variable – customer satisfaction – is measured at the side of the customer. A five-item scale of Homburg and Stock (2004) is used. The scale includes items such as ‘on an overall basis, we are satisfied with this supplier’ or ‘we are very pleased with additional services this firm delivers.’
Analysis
As the first step of the analysis, I have performed an exploratory factor analysis (EFA) in SPSS 22 using a principal component analysis with verimax rotation. The EFA was conducted for the constructs measured by suppliers, focal firms, and customers separately. Based on the results of the EFA analyses, items that loaded into more than one construct or did not load to any construct were deleted. Afterwards, I have performed a confirmatory factor analysis (CFA) in LISREL 8.80, using maximum likelihood estima- tion. The CFA was conducted for supplier, focal firm, and customer variables separately as well and addi- tional adjustments were done based on the results. The results of the CFA are reported in Table 1.
Subsequently, reliability analysis was conducted in SPSS 22 and Cronbach’s alphas were calculated for each construct to secure the reliability of the measurement scales. The results are also reported in Table 1.
Table 1
Confirmatory factor analysis loadings, t-values, and Cronbach’s alpha
Construct Item Factor Loadings t-Value Cronbach's alpha
Supplier's Innovativeness SINN1 .47 4.09 α = .695
SINN2 .98 7.02
SINN3 .54 4.60
Supplier's CSR Orientation SSO1 .81 7.33 α = .751
SSO2 .75 6.77
SSO3 .57 5.12
Supplier's End-User Orientation SMO1 .65 6.28 α = .816
SMO2 .60 5.73
SMO3 .82 8.63
SMO4 .69 6.80
SMO5 .69 6.77
Degree of Embeddedness EMB1 .60 4.84 α = .700
EMB2 .91 6,34
χ2 = 65.24; df. = 59; RMSEA = .035; NFI = .85; CFI = .95; GFI = .90
Focal Firm's Innovativeness INN1 .60 5.44 α = .757
INN2 .61 5.60
INN3 .77 7.42
INN4 .46 4.06
INN5 .67 6.22
Focal Firm's CSR Orientation SO1 .78 8.28 α = .857
SO2 .71 7.19
SO3 .81 8.73
SO4 .61 5.90
SO5 .64 6.28
SO6 .56 5.34
SO7 .67 6.67
Focal Firm's End-User Orientation MO1 .80 7.54 α = .778
MO2 .78 7.35
MO3 .63 5.88
χ2 = 105.44; df. = 87; RMSEA = .049; NFI = .87; CFI = .97; GFI = .86
Customer Satisfaction CS1 .81 8.78 α = .808
CS2 .89 10.12
CS3 .68 6.85
CS4 .83 9.18
CS5 .34 3.15
χ2 = 4.51; df. = 5; RMSEA = .000; NFI = .98; CFI = 1.00; GFI = .98
RMSEA - Root Mean Square Error of Approximation; NFI - Normed Fit Index; CFI - Comparative Fit Index; GFI - Goodness of Fit Index
16 The Cronbach’s alpha values for the constructs ranged from .695 to .857, which means the values are in an acceptable range (Nunnaly, 1978). Based on the goodness of fit statistics, the models have a good fit (Hair, Tatham, Anderson, Black, & Babin, 2006). For supplier variables it is χ2 = 65.24, df. = 59, Root Mean Square Error of Approximation (RMSEA) = .035, Normed Fit Index (NFI) = .85, Comparative Fit Index (CFI) = .95, and Goodness of Fit Index (GFI) = .90. For focal firm variables χ2 = 105.44, df. = 87, RMSEA = .049, NFI = .87, CFI = .97, GFI = .86. Finally, for customer variables χ2 = 4.51, df. = 5, RMSEA = .000, NFI = .98, CFI = 1.00, GFI = .98.
As the second step, descriptive statistics and correlations were calculated for the constructs in the conceptual model. The results are reported in Table 2.
In the third step, the relationships between the constructs were analyzed in LISREL 8.80 by path analysis using maximum likelihood estimation procedure. Some modification indices and additional rela- tionships were suggested by the program as the hypothesized model has been run. The model has been, therefore, rerun with the additional relationships included, resulting in a few non-hypothesized relation- ships, reported in the results diagram (see Figure 2). The goodness to fit statistics for the final model are χ2 = 26.08, df. = 34, RMSEA = .000, NFI = .86, CFI = 1.00, GFI = .96.
Finally, a post-hoc probing was conducted for the significant moderation effects, using the method of Holmbeck (2002). The method is superior to both visual inspection as well as bivariate correlation meth- od, as it provides regression equation and offers more flexibility for plotting the interaction effects (Holmbeck, 2002). For each significant moderation effect, the following procedure has been applied. First, conditional variables for the moderator variable were computed, both for high levels (1 SD above mean) and low levels (1 SD bellow mean) of values. Subsequently, new interaction variables of the independent variable and the conditional variables were computed.
Second, post-hoc regressions with simultaneous entry were conducted, each including the main ef- fect, one of the conditional variables, and corresponding new interaction variable. Additionally, a regres- sion with original variables was conducted in order to determine the regression line for the medium level (mean) of the moderator variable. Finally, the regression lines were plotted, by substituting low (1 SD below mean) and high (1 SD above mean) values of the independent variables (see Figure 3).
Table 2
Descriptive statistics and correlation matrix Mean Std.
Dev. A B C D E F G
Supplier's Innovativeness A 5.87 .87
Supplier's CSR Orientation B 4.98 1.12 .182
Supplier's End-User Orientation C 5.48 .90 .182 .208
Degree of Embeddedness D 5.76 .96 .195 .226* .420**
Focal Firm's Innovativeness E 5.45 1.02 .180 - .080 .045 .055
Focal Firm's CSR Orientation F 4.65 1.22 .080 .105 - .104 .047 .258*
Focal Firm's End-User Orientation G 4.28 1.61 .067 .134 .051 - .012 .157 .328**
Customer Satisfaction H 5.54 .80 - .098 .111 - .006 .018 .248* .156 .055
* p < .05; ** p < .01 (Two-Tailed)
17
Results
The results of the path model (see Figure 2) offer a partial support for the research hypotheses.
While H1a, suggesting a positive relationship between the focal firm’s end-user orientation and its own CSR orientation is supported (b = .19; p < .01), H1b, suggesting the same relationship for the supplier is not supported. Conversely, the results do not support H2a, proposing a positive relationship between the focal firm’s end-user orientation and its innovativeness, whereas the same relationship for the supplier was found to be significant and positive (b = .18; p < .05), supporting H2b. Hypotheses H3a and H3b, relating CSR orientation and innovativeness for the focal firm and the supplier respectively, were both supported (H3a: b = .20; p < .01; H3b: b = .17; p < .05). These results suggest that the relationship between end-user orientation and innovativeness is mediated by CSR orientation for the focal firm, while for the supplier the relationship is direct.
Additionally, H4a and H4b hypothesize a positive relationship between the focal firm’s innova- tiveness and customer satisfaction, and between the supplier’s innovativeness and customer satisfaction re- spectively. The results support H4a (b = .21; p < .01), although the results show no support for H4b. H5 suggested a positive relationship between the supplier’s innovativeness and the focal firm’s innovativeness.
The results support this hypothesis (b = .21; p < .05) and, therefore, indicate that the focal firm’s innova- tiveness fully mediates the relationship between the supplier’s innovativeness and customer satisfaction.
H6a and H6b, based on the downstream power (Emerson, 1962), are not supported.
Figure 2. Non-standardized path coefficients for the conceptual model χ2 = 26.08; df. = 34; RMSEA = .00; NFI = .86; CFI = 1.00; GFI = .96
* p < .05; ** p < .01 (One-Tailed)
18
Figure 3. The moderating effects of the degree of embeddedness† p < .10; * p < .05 (Two-Tailed)
Building on the foundations of embeddedness (Uzzi, 1997), I hypothesized moderating role of the degree of embeddedness between the supplier and the focal firm. H7a proposed the variable’s positive moderation of the relationship between the focal firm’s end-user orientation and the supplier’s end user orientation. The results do not support the hypothesis, however, a strong direct relationship between the degree of embeddedness and the supplier’s end-user orientation was found (b = .42; p < .01). A moderation effect on the relationship between the focal firm’s and the supplier’s CSR orientation was found (b = .24;
p < .01), supporting H7b. The plot of the interaction indicates a positive relationship between the focal firm’s and the supplier’s CSR orientation for high levels of embeddedness (b = .340; p < .05), while for low and medium levels, the relationship is not significant (see Figure 3a). Moreover, the direct relationship be- tween the degree of embeddedness and the supplier’s CSR orientation was found as well (b = .25; p < .05).
Finally, H7c has been supported as well, as the moderation effect on the relationship between the supplier’s innovativeness and the focal firm’s innovativeness was found (b = .18; p < .01). The interaction plot shows that the relationship between supplier’s and focal firm’s innovativeness is positive under the conditions of
b = .340*
b = .093n.s.
b = -.155n.s.
3,5 4,0 4,5 5,0 5,5 6,0
-1 SD +1 SD
Supplier's CSR Orientation
Focal Firm's CSR Orientation High Embeddedness Medium Embeddedness Low Embeddedness a)
b = .405* b = .250† b = .096n.s.
3,5 4,0 4,5 5,0 5,5 6,0
-1 SD +1 SD
Focal Firm's Innovativeness
Supplier's Innovtiveness High Embeddedness Medium Embeddedness Low Embeddedness b)
b = -.139n.s.
b = .047n.s.
b = .233*
4,0 4,5 5,0 5,5 6,0 6,5
-1 SD +1 SD
Supplier's Innovativeness
Focal Firm's CSR Orientation High Embeddedness Medium Embeddedness Low Embeddedness
c) b = .053n.s.
b = -.088n.s.
b = -.230*
3,5 4,0 4,5 5,0 5,5 6,0
-1 SD +1 SD
Supplier's End-User Orientation
Focal Firm's CSR Orientation High Embeddedness Medium Embeddedness Low Embeddedness d)
