1 SPILLOVER MANAGEMENT
IN BUYER-SUPPLIER RELATIONSHIPS
Master thesis, MSc Supply Chain Management
University of Groningen, Faculty of Economics and Business
DATE 6/03/2017
CAROLINE SCHULZ Student number: 2596113 Email: c.s.schulz@student.rug.nl
2 SPILLOVER MANAGEMENT IN BUYER-SUPPLIER-RELATIONSHIPS
Abstract
This research investigates how governance in buyer-supplier relationships can support management and control for involuntary spillovers. Often multiple (competing) buyers source from the same supplier. Shared suppliers are seen as channels through which knowledge and sensitive information could leak out to competitors. This research includes multiple cases, which are different supplier firms operating in the automotive and high-technology industry, to gain deeper insights into governance mechanisms and alternative mechanisms of spillover prevention. Thereby the governance concept as defined by Liu, Luo & Liu (2009) is used and different spillover types are defined. The analysis and results suggest contracts to be the dominant governance mode of spillover prevention offering the highest level of protection. Firms prefer the use of governance modes with higher levels of protection when trying to prevent spillover occurrence. Further, multiple alternative mechanisms were found to be an important complement to governance mechanisms in the protection against involuntary spillovers.
Paper type – Case study
3 CONTENT LIST OF FIGURES ... 4 LIST OF TABLES ... 4 1. INTRODUCTION ... 5 2. THEORETICAL BACKGROUND ... 6 2.1 Spillover Management ... 6 2.1.1 Knowledge/Technology Spillovers ... 8
2.1.2 Supplier Development/ Improvement ... 9
2.1.3 Resources and Capacity ... 10
2.2 Governance in Buyer-Supplier Relationships ... 11
2.3 Conceptual Model ... 14
3. METHODOLOGY ... 15
3.1 Method ... 15
3.2 Research Setting... 17
3.3 Case Selection and Sample ... 17
3.4 Development Interview Protocol and Data Collection ... 18
3.5 Data Analysis ... 19
4. ANALYSIS ... 20
4.1 Spillover Risks ... 20
4.2 Governance and Prevention of Spillovers ... 23
4.3 Alternative Mechanisms for the Prevention of Spillovers ... 28
4.4 Patterns on Governance and Prevention of Spillovers ... 30
5. DISCUSSION ... 32
5.1 Spillover Risks ... 32
5.2 Governance and Prevention of Spillovers ... 32
6. CONCLUSION... 34
Managerial Implications ... 34
Limitations and Future Research ... 35
REFERENCES ... 36
APPENDIX ... 41
Appendix 1: Case Study Protocol ... 41
Appendix 2: Case Study Database ... 45
4
Appendix 4: Customer Security Concept ... 60
LIST OF FIGURES Figure 1 Conceptual Model ... 15
Figure 2 Information and Knowledge Exchange Between Supplier and Buyer ... 22
Figure 3 Importance of Governance and Alternative Mechanisms for Spillover Management ... 33
LIST OF TABLES Table 1 Spillover Classification ... 7
Table 2 Supplier Development Activities ... 10
Table 3 Typology of Case Studies (based on Voss, 2009) ... 16
Table 4 Case Selection Criteria ... 17
Table 5 Summary Interviews and Interviewees... 19
Table 6 Reliability and Validity in Case Study Research (based on Yin (1994, 2009) and Voss (2009)) ... 19
Table 7 Overview of Codes and Spillover Types ... 21
Table 8 Contract Types ... 24
Table 9 Alternative Spillover Prevention Mechanisms... 30
5 1. INTRODUCTION
In the past years the business environment firms are operating in has become increasingly complex and fast changing implying shorter product life cycles, rapid innovations and technological complexity (Mahapatra, Narasimhan & Barbieri, 2010). Firms are not able to internalize all resources and capabilities necessary for production but have to rely on external partners, referred to as suppliers, possessing the required competencies (Bozarth, Warsing, Flynn & Flynn, 2009; Modi & Mabert, 2007). One supplier often serves multiple firms, which might be competitors of each other (Agrawal, Kim, Kwon, & Muthulingam, 2016; Markoff, 2001). Sourcing from the same supplier implies that any efforts a firm takes to improve the performance, such as reliability of the shared supplier, could be beneficial not only to the focal firm but also to its direct competitors ‘free riding’ on these investments (Mesquita, Anand, & Brush, 2008; Wang, Xiao, & Yang, 2014). Mesquita et al. (2008) illustrate this problem mentioning the examples of Toyota and John Deere; both invested in supplier development programs, but were unable to keep the benefits of these initiatives exclusively to themselves. However, this is not the only aspect firms are confronted with, and there are further dangers and risks buyers are exposed to when sourcing from the same supplier as their competitors.
In buyer-supplier relationships buyer firms often share information, resources and knowledge with their supplier aiming to receive well adapted products of high quality from the supplier (Dyer & Nobeoka, 2000). However, firms should be aware that knowledge can flow out (Isaksson, Simeth, & Seifert, 2016). Buyer-supplier relationships are considered to be a channel of spillovers (Dyer & Nobeoka, 2000; Isaksson, Simeth, & Seifert, 2016; Todo et al., 2016), through which sensitive information could leak out to competitors, in particular when multiple firms source from a common supplier (Cassiman & Veugelers, 2002). This implies that shared suppliers are means through which valuable information and knowledge of a buyer firm can be spread within a supply chain network and thus also reachcompetitors (Todo et al., 2016). Knowledge, for instance, can spill over to competitors or other firms in the supply chain network, through people or incorporation in traded goods (Feldman, 1999).
Research on spillover management, in particular from the supplier perspective, is limited. Outgoing spillovers are considered to negatively affect a firm’s profits when knowledge spills over to competing firms (Czarnitzki & Kraft, 2012). Thus, it is crucial for firms to try to limit the amount of outgoing spillovers. However, so far little is known on the practices suppliers apply to prevent involuntary spillovers and leakages between the buyer firms they are serving. Further, there is a lot of research on governance in buyer-supplier relationships, but research linking governance of buyer-supplier relationships and spillover management seems to be very limited.
6 2016). Spillovers can occur in different areas, for instance regarding knowledge (Feldman, 1999; Griliches, 1992), technology and product market (Bloom, Schankerman, & Van Reenen, 2013) or productivity (Isaksson et al., 2016). Governance, which is defined as “actions or mechanisms by which both parties behave, leading to the fulfilment of joint objectives” (p.295, Liu, Luo & Liu, 2009), is expected to influence the spillover management in buyer-supplier relationships. Therefore, governance builds a starting point when analyzing how spillovers in buyer-supplier relationships are managed and controlled for. The underlying research question is how does governance within a buyer-supplier relationship support the management and control of spillovers when competing buyer firms source from the same supplier?. Investigating on this topic this research also aims to find out more on buyer firms’ perceptions of spillover management in buyer-supplier relationships.
This paper is structured as follows: Firstly, relevant findings and concepts from academic literature will be discussed. Afterwards the method will be explained and the case study will be conducted , which is followed by an analysis of the collected data, a discussion and a conclusion pointing out the most important findings of this research.
2. THEORETICAL BACKGROUND
This research aims to investigate actions and mechanisms buyers and suppliers can apply to prevent spillover and leakage of sensitive information between competing buyer firms they serve. This chapter will explain findings on relevant concepts before the conceptual model is introduced in section 2.3.
2.1 Spillover Management
In today’s constantly changing environment it is important for firms to keep up and further develop their resources and technologies in order to stay competitive and survive. Firms increasingly look for external knowledge, which is complementary to their own internalized knowledge and R&D (Cohen, Nelson, & Walsh, 2002). Newly learned capabilities as well as advanced technology and resources help the supplier firm to improve its performance and become more attractive to buyer firms across different industries (Mesquita et al., 2008). This often leads to a situation where one supplier delivers to several buyer firms, which can be competing against each other on the market (Agrawal et al., 2016; Markoff, 2001). Sourcing from the same supplier as competing firms bears the risk that involuntary spillovers between competing buyer firm occur as suppliers, or respectively buyer-supplier relationships, are regarded to be a channel through which leakage or spillovers can take place (Cassiman & Veugelers, 2002; Isaksson et al., 2016; Todo et al., 2016).
7 have a negative effect on the firm, its competitiveness and performance and thus mostly are unwanted or involuntary (Bloom et al., 2013; Cassiman & Veugelers, 2002). Therefore firms try to prevent or at least minimize outgoing spillovers (Cassiman & Veugelers, 2002; Javorcik, 2004). This research will focus on outgoing spillovers, and thus, when referring to spillovers in later sections, outgoing spillovers are meant.
Literature further distinguishes between different types of spillovers and spillover effects, such as knowledge spillovers (Feldman, 1999; Griliches, 1992; Isaksson et al., 2016) and the effect of leaking knowledge and technology on competitors and the product market (Bloom et al., 2013) as well as spillover of buyer firm’s supplier improvement efforts (Wang et al., 2014), and productivity spillovers (Isaksson et al., 2016; Javorcik, 2004). These types of spillovers can be applied generally but also be an issue in buyer-supplier relationships, which will be analyzed in this research. Buyer-supplier relations can be regarded as a channel for knowledge diffusion as buyers often provide information and knowledge to their suppliers (Dyer & Nobeoka, 2000). Isaksson et al. (2016) emphasize that most empirical studies revealed buyer-supplier relationships to be an important channel for productivity spillovers to occur. An overview and classification of spillover types is provided in the table below.
Reference Classification Definition Effect Own
Classification Feldman, 1999 Griliches, 1992 Isaksson et al., 2016 Knowledge spillovers
“informal, unintentional and uncompensated transfers of knowledge”
(p.700, Isaksson et al., 2016) “involuntary leakage of useful technological information” (p.2, De Bondt, 1996)
“commercially sensitive information […] leaks out to competitors through common suppliers” (p. 1179, Cassiman& Veugelers, 2002) Leakage of commercially sensitive information on -Knowledge -Technology
“increase the productivity of other firms that operate in similar technology areas” (p.2, Bloom et al., 2013) -Product Market
rivalry effect of R&D spillovers “have a negative effect on a firm’s value due to business stealing” (p.2, Bloom et al., 2013) Knowledge/ Technology Spillovers Wang et al., 2014 Isaksson et al., 2016, Javorcik, 2004 Supplier improvement efforts Productivity spillover
A buyer’s activities to enhance supplier capabilities
Technical assistance to suppliers, management training, support with organization of the production process, purchase of raw materials also benefits other firms sourcing from the same supplier (Javorcik, 2004)
Enhancement of supplier production may benefit direct competitors, e.g. by also shortening their cycle time, improving their production Buyer’s efforts to improve the productivity and efficiency of a supplier will also benefit and is used by other firms, which could apply the productivity enhancement also for themselves
Supplier Development/ Improvement
Spillovers
8 Based on the spillovers found in literature, this research compiled two different types of spillovers: knowledge/technology spillovers and supplier development/ improvement spillovers. The spillover types imply that any information and investments, knowledge or technology, thus anything the buyer firm shares with or allocates at the supplier, can be subject to spillovers and thus creates risks for spillover occurrence.
Multiple authors remarked that often a common supplier from which competing buyers are sourcing poses a problem and danger for spillovers to occur (e.g. Cassiman & Veugelers, 2002; Mesquita et al., 2008; Todo et al., 2016; Wang et al., 2014). Therefore, this research aims to add to existing literature by also analyzing the effect of (shared) resources and capacities at a common supplier, such as shared machines, production areas, employees, on spillover occurrence. Concluding, this research will focus on the two defined spillover types as well as shared resources and capacity when analyzing how spillovers between competing buyer firms sourcing from the same supplier can be prevented.
2.1.1 Knowledge/Technology Spillovers
When engaging in buyer-supplier relationships buyer firms often disclose their knowledge, for instance regarding their products and product developments, to the supplier aiming to purchase high-quality products from the supplier (Dyer & Nobeoka, 2000), which fulfills their specific requirements and needs possibly improving the performance of the whole supply chain (Isaksson et al., 2016). However, supply chain networks are regarded as channels of knowledge diffusion (Dyer & Nobeoka, 2000; Todo et al., 2016). Thus sharing information with a supplier comprises not only the benefits of procuring adjusted products of high quality but also bears the risk of knowledge flowing out (Isaksson et al., 2016). Knowledge and sensitive information shared with a common supplier could leak out to competitors, which is harmful to the firm (Cassiman & Veugelers, 2002). These often involuntary transfers of knowledge between competing firms are summarized under the term ‘knowledge spillover’ (Bloom et al., 2013). According to Feldman (1999) knowledge spillovers are passed on either through people or are incorporated in traded goods, for instance products produced by the supplier for a buyer.
9 knowledge and technology spillovers: Technology leaking out leads to enhancement of other firms’ productivity while leaking knowledge and technology of a firm’s new product lead to product market spillovers, or as they call it ‘product market rivalry effect of R&D’. The second effect refers to business stealing and therefore has a negative impact on the affected firm (Bloom et al., 2013).
The knowledge and innovations generated from R&D and innovative activities were found to add value to the firm only when being safeguarded by intellectual property rights, which prevent spillovers to competitors (Czarnitzki & Kraft, 2012). Thus, firms try to keep the benefits of their R&D and innovative activities for themselves by managing and monitoring the outflows and information on knowledge becoming publicly available (Cassiman & Veugelers, 2002). From this it can be concluded that innovations, especially those concerning future products, are important for the firm and its performance and therefore should be protected from spillovers.
Mechanisms how suppliers, or buyers and suppliers jointly in the buyer-supplier relationship, can prevent knowledge spillovers from buyer firms will be analyzed and discussed later in this paper.
2.1.2 Supplier Development/ Improvement
Supplier development can be defined as activities initiated by the buyer firm with the aim to improve the performance of the supplier (Krause, Handfield & Scannell, 1998), while supplier improvement refers to buyer’s efforts to improve certain parts of the supplier, such as processes, capabilities (Wang et al., 2014). Another term, referring to similar activities, is process improvement initiatives used in the research by Veldman & Gaalman (2015). Different terms have been established in literature, which are overlapping and referring to efforts buyers undertake with the aim to implement improvements at their suppliers from which they could profit as well. This research summarizes these efforts under the term supplier development and improvement.
Buyer firms invest in their supplier aiming to achieve higher supplier productivity, decrease costs and finally achieve competitive advantage towards their competitors (Mesquita et al., 2008). The performance and reliability of a supplier is crucial for the competitiveness of buyer firms (Wang et al., 2014). Based on the work of several researchers Mortensen and Arlbjørn (2012) compiled a list with different supplier development activities:
Activity Reference
Introduction of competition to the supply base Dyer & Ouchi (1993), Giunipero (1990), Krause & Ellram (1997)
Supplier evaluation for further development Forker & Hershauer (2000), Forker, Ruch & Hershauer (1999) Krause & Ellram (1997), Sánchez-Rodríguez et al. (2005)
Supplier certification Supplier plant visits
Involvement of suppliers in the buyer’s new product development process
10 Elevation of performance expectation/goals
Recognition and rewards
Direct investment in the supplier by the buying firm Exchange of personnel between buyer and supplier organizations
Krause & Ellram (1997)
Promise of future benefits Giunipero (1990), Krause & Ellram (1997), Sánchez-Rodríguez et al. (2005)
Training and education of supplier’s staff Forker & Hershauer (2000), Forker et al. (1999), Krause & Ellram (1997), Krause, Scannell & Calantone (2000), Sánchez-Rodríguez et al. (2005)
Intensive information exchange with suppliers Krause (1999) Collaboration with suppliers in the improvement of
materials and development of new materials
Forker & Hershauer (2000), Forker et al., (1999) Table 2 Supplier Development Activities
These activities, as part of supplier development programs, are important means of buyer firms to improve capabilities and performance of the supplier (Mortensen, Freytag & Arlbjørn, 2008).
However, executing supplier development programs and benefitting from its profits is not always easy. Mesquita et al. (2008) remark that suppliers that benefitted from supplier development and improvement initiatives might perform better compared to those which did not. However, in case the enhanced performance benefits are not exclusive to the buyer that initiated the supplier development program, the buyer would have gained no advantages in return for his efforts as other (competing) buyer firms could potentially exploit his investments by collaborating with the trained supplier (Mesquita et al., 2008). This means that improved supplier performance as a result of buyer firm investments simply can spill over and make other buyer firms benefit from it as well (Alcácer & Chung, 2007). Several authors address this problem and found that supplier development spillovers can occur from different investments of buyer firms in the supplier, such as firms’ investments in supplier’s cost efficiency (Knott, Posen, & Wu, 2009), inventory management (Yao, Dong, & Dresner, 2012) and the establishment of processes (Andritsos & Tang, 2014). Wang et al. (2014) study spillover effects of improved supplier reliability as a result of a buyer firm’s supplier improvement efforts. Firms have different attitudes towards supplier development and improvement spillovers; some firms hardly accept their supplier improvement efforts to spill over and benefit other buyer firms (Farney, 2000), while others, such as Toyota, accept that spillovers exist and can benefit competitors (Dyer & Nobeoka, 2000). Wang et al. (2014) suggest that buyer firms should initiate supplier development programs without considering possible spillover effects.
2.1.3 Resources and Capacity
11 technology, available human resources (Qi et al., 2015; Wang et al., 2014). Information and knowledge can leak being incorporated in traded resources, goods or transmitted through people enhancing the risk of spillovers (Feldman, 1999). Thus, through shared supplier resources information and knowledge can spill over from one buyer to another.
Firms are worried of spillovers, supply shortages or exposure to supply disruptions and often invest in shared suppliers to overcome these risks (Qi et al., 2015). These investments aim, for instance, to expand the supplier’s capacity and thus provide the firm with additional supplier capacity (Qi et al., 2015). However, with multiple firms sourcing from the same supplier, there is a risk that an investment undertaken by one firm, could also be used by other firms, or even competitors (Agrawal et al., 2016). Therefore, investment strategies vary depending on whether a supplier is shared or exclusive (Feng & Lu, 2013). Investing firms often decide to restrict the use of their investments, such as capacity, by means of contracts, or other restrictions, guiding the supplier’s use and treatment.
2.2 Governance in Buyer-Supplier Relationships
In this research governance mechanisms supporting the supplier to prevent spillovers between competing buyer firms are analyzed. Intense competition and complex management strategies increase the importance of a well functioning buyer-supplier relationship (Cannon, Achrol, & Gundlach, 2000). Firms face the challenge of constructing governance that protects the exchange while at the same time optimizes benefits for the parties involved (Cannon et al., 2000). Governance has a high impact on the stability of relationships between buyers and suppliers (Benton & Maloni, 2005; Carr & Pearson, 1999). According to Liu, Luo and Liu (2009) governance in buyer-supplier relationships “involves actions or mechanisms by which both parties behave, leading to the fulfillment of joint objectives” (p.295). Governance is implemented in interorganizational relationships by making use of transactional and relational mechanisms (Aulakh, Kotabe & Sahay, 1996; Brown, Lusch & Nicholson, 1995; Heide & John, 1992; Jap & Ganesan, 2000), which will be explained in more detail in the following two subchapters. Research on interorganizational governance suggests that the firms involved should apply multiple mechanisms (Liu et al., 2009).
2.2.1 Relational Mechanisms
12 relationship over time (Lahiri & Kedia, 2011). The constructs of relational quality, as developed by Kim and Choi (2015), involve among other factors, trust and relational norms. Thus, based on the research of Kim and Choi (2015), one can conclude that trust and relational norms affect the quality of the relationship as well as the supply chain performance.
Relational Norms “expected norms shared by a group of decision-makers and directed toward collective goals” (p.297, Liu et al., 2009)
“a party’s perception of whether its partner shares the understanding regarding mutually accepted behaviors” (p.69, Kim & Choi, 2015)
Trust “confidence or belief that one partner possesses about the honesty and benevolence of the other partner” (p.297, Liu et al., 2009)
“a belief that one relationship partner will act in the best interests of the other partner” (p.8, Wilson, 1995)
Relational Norms
Behavior of individuals and organizations is, at least to some extent, influenced by norms (Dwyer, Schurr, & Oh, 1987). The purpose of norms is to support the well-functioning of relationships (Heide & John, 1992). The development of relational norms is enhanced by interaction between the related firms (Paulssen, Leischnig, Ivens, & Birk, 2016). Paulssen et al. (2016) see relational norms as an implicit code of conduct, which is important for the functioning of a buyer-supplier relationship. Relational norms fortify the involved parties to behave appropriately and dissuade them from opportunistic behavior (Heide & John, 1992). Trust has been identified to highly influence relational norms (Paulssen et al., 2016). Three norms were found to be most relevant in interorganizational relationships, namely solidarity, reciprocity and flexibility (Heide & John, 1992; Kaufmann & Stern, 1988). Thus, relational norms can be seen as the complementary non-formal part to the more formal, written rules of governance, such as contracts and agreements guiding the behavior of the parties involved in the relationship (Heide & John, 1992). Relational norms and trust both enhance the parties to fully benefit from relationship-specific opportunities (Liu et al., 2009).
Trust
13 and Chu (2000) state that trust in buyer-supplier relationships can be a source of competitive advantage: it decreases transaction costs (Barney & Hansen, 1994), alleviates investments in relationship-specific assets (Dyer, 1996) and improves information sharing between the parties involved (Liu et al., 2009).
2.2.2 Transactional Mechanisms
According to Liu et al. (2009) transactional mechanisms “provide a legal and institutional framework within which relational mechanisms can perform while relational mechanisms redress the deficiency of legal and institutional ordering in a socially confined economic structure” (p.296). The underlying idea of transactional mechanisms is, according to the concept of transaction cost economics, to support the governance of interorganizational relationships through monitoring and incentive alignments (Liu et al., 2009). Transactional mechanisms involve jointly determined agreements, thus contracts, and transaction-specific investments from the parties involved (Brown, Dev, & Lee, 2000; Cannon et al., 2000; Heide & John, 1992).
Contract “stipulates the rights and obligations of both parties through formal rules, terms, and procedures; explicitly states how various future situations will be handled” (p.297, Liu et al., 2009)
Transaction-Specific “tangible and intangible investments tailored to a particular long-term Investment supply chain” (p.297, Liu et al., 2009)
Contracts
14 legal forces (Liu et al., 2009). The disadvantages of contracts can be compensated for by developing relational norms and trust within the interorganizational relationship (Luo, 2007).
Transaction-Specific Investments
Transaction-specific investments are investments made by the parties that are partnership-specific and difficult to apply outside the relationship (Liu et al., 2009). Parties that decided to invest in their relationship have an incentive to continue the cooperation until they earn back the value of their investment (Liu et al., 2009). Transaction-specific investments amplify the mutual dependence of the firms and therefore encourage them to maintain their relationship (Jap & Anderson, 2003). These investments can be either tangible, for instance specific tools, machines, or intangible, like tacit knowledge, a specific capability or technology, or relationship-specific training of staff (Jap & Anderson, 2003; Liu et al., 2009; Wagner & Bode, 2014). They stimulate the parties to make use of and profit from relationship-specific opportunities that are created by investments in strategic assets (Liu et al., 2009). By investing in the relationship both parties can benefit from enhanced value creation such as efficiency improvement, cost saving and profit maximization (Ghosh & John, 1999). Thus, according to Kotabe, Martin and Domoto (2003), and Mudambi and Helper (1998), transaction-specific investments guide buyer-supplier relationships and decrease uncertainty and conflict by giving the parties incentives to continue collaboration.
Transaction-specific investments and contracts are supplementary as contracts determine the “important conditions and measures of governance that are not covered in transaction-specific investments while transaction-specific investments furnish extra economic incentives” to continue the relationship, which is not possible through contracts (Liu et al., 2009, p. 295). Liu et al. (2009) advise firms to use relational and transactional mechanisms jointly as their research reveals that both mechanisms are complementary and most effective for the relationship when applied together.
2.3 Conceptual Model
This research aims to investigate the relation between governance and spillover prevention, in particular which governance mechanisms with their different characteristics, could support the prevention of spillovers.
15 governance mechanisms as defined by Liu et al. (2009) are contracts, transaction-specific investments, relational norms and trust. The use of governance and possibly additional mechanisms to protect against spillovers might differ between different buyer-supplier relationships. This is characterized by different type of circle lines in Figure 1. The lines are dashed to illustrate the imperfect protection against spillovers; in the past multiple firms experienced spillovers unwillingly.
This research classified two spillover types - knowledge/technology spillovers, supplier development/improvement spillovers - as well as the effect of shared resources and capacity on spillover occurrence for analyzing the research question ‘How does governance within a buyer-supplier relationship support the management and control of spillovers when competing buyer firms source from the same supplier?’.
3. METHODOLOGY
This research uses qualitative data to investigate how governance mechanisms within buyer-supplier relationships can help to prevent spillovers and is considered to be exploratory, by developing new theory.
3.1 Method
Case study research is particularly appropriate for research purposes like exploration and theory building (Eisenhardt & Graebner, 2007). This is relevant because the phenomenon spillover and spillover management have already been detected, however, so far, only to some extent. This leaves room for further theory development, especially from the supplier perspective. According to Meredith (1998) the case study methodology enables the researcher to study a phenomenon in its natural setting and observations gained generate meaningful theory, which is an important strength of case study
16 research. Furthermore, case study research allows to study a phenomenon in its natural setting and to draw conclusions from observations of actual practices (Voss, 2009). Doing case study research involves collecting a large amount of qualitative data, for instance by conducting interviews. The analysis of the collected data serves as a foundation for theory building (McCutcheon & Meredith, 1993). Theory is built based on patterns and relationships observed in their natural context (Eisenhardt & Graebner, 2007). This research aims to identify how different governance mechanisms can be applied in buyer-supplier relationships to control for and prevent the occurrence of spillovers. The object of this research are the four different governance mechanisms as described by Liu et al. (2009), contracts, transaction-specific investments, relational norms and trust as variables, and their impact on the prevention of the different spillover types. This will be analyzed from a network perspective, including three supplier firms, of which one provides qualitative data on relationships with customers, thus buyers, as well as their own suppliers. Therefore a case study research seems to be the most appropriate research method for the given conditions and the aim of this research. The unit of analysis is a supplier firm serving competing customers, to shed light on spillover risks and prevention in buyer-supplier relationships with competing buyers from the supplier perspective and gain insights on the application of different governance mechanisms.
Research has categorized different types of case studies, which are summarized in the table below.
Type of case study Advantages Disadvantages
Single case study Greater depth Limits on generalizability
Biases such as misjudgment of representativeness
Multiple case study Augment external validity Guards against observer bias
More resources needed Less depth per case
Retrospective case study Collection of data on historical events Difficult to determine cause and effect Participants may not recall important events
Longitudinal case study Determination of cause and effect Recall important events
Time consuming Table 3 Typology of Case Studies (based on Voss, 2009)
17 3.2 Research Setting
As this research is about the phenomenon of spillover and spillover management in buyer-supplier relationships with one supplier serving multiple competing buyers, the research setting needs to contain an environment where knowledge, R&D and innovation are crucial for firms’ competitiveness and their loss would be devastating for the firm and its market position, which makes firms attempting to prevent leakage.
In the past years the automotive industry has become more complex and OEMs are increasingly relying on suppliers producing about 65 to 70% of the final product’s value (Maurer, Dietz, & Lang, 2004). Thus, suppliers do not simply assemble parts, but increasingly take over tasks and responsibility for complex assembled system, knowledge creation and even play a role as innovators (Li, 2013; Maurer et al., 2004). This implies exchange and flows of sensitive data, knowledge and information between OEMs and suppliers, which must not leak. Therefore case companies were searched for in this industry. Additionally, the high-technology industry was regarded as being suitable for this research because of its latest developments suggesting increasing complexity and fast product life cycles making collaboration between buyers and specialized suppliers crucial. Both industries have in common that they are very competitive and rely on complex technologies and innovations, which determine firm’s competitiveness and thus, create a risk for spillovers to occur.
3.3 Case Selection and Sample
Before approaching potential case companies they were screened on the fulfillment of certain criteria to check whether they are suitable for this research. The selection criteria are summarized in the table below.
Criteria Reasoning/Motivation
1. Firm supplies buyers offering a similar product on the market, implying they are competitors, or rely on similar technologies
Only when firms rely on a similar technology or offer a similar product, spillovers bear a risk or danger and are disadvantageous for the firm losing valuable data, information, knowledge and at the same time beneficial for firms receiving the leaked data, information, knowledge
Thus, firms have a motive trying to prevent spillovers. 2. Firm has regular, close buyer-supplier
relationships
(as opposed to arm’s length relationships)
Only in these buyer-supplier relationships buyers share sensitive data, information, knowledge that are confidential and valuable, and thus could be object to spillovers
(in contrast to arm’s length market relationships, which are more superficial)
3. Firm supplies multiple firms with (manufactured) products
Experience/knowledge of different types and practices of buyer-supplier relationships
Table 4 Case Selection Criteria
18 seen as an advantage and opportunity to collect more in-depth data and thus gain deeper insights. Additionally, cases were selected in such a way that they probably have similar results, thus according to literal replication logic (Voss, 2009).
From all companies contacted, three were willing to participate and are included as case companies in this research. These are Norma, a high-technology first tier supplier (referred to as company A); a supplier for automotive glazing products (referred to as company B) and Peiner Umformtechnik (PUT), a supplier producing fasteners and advanced forged components (referred to as company C). The firms were selected as they met the above mentioned selection criteria. Company B and C are mainly operating in the automotive industry and engage in relationships with multiple competing buyers. Company A supplies firms of multiple industries, such as defense, medical and aerospace, with high-technology products.
3.4 Development Interview Protocol and Data Collection
This research aims to investigate the phenomenon of spillover management in buyer-supplier relationships from the network perspective using data from supplier firms on relationships with their buyers as well as their suppliers. The main source of data in this research is interviews. Interviews and face-to-face meetings are believed to provide the researcher with rich data and the opportunity to clarify unclear statements and prevent misunderstandings. The aim of the interviews is to explore how different governance mechanisms can support management and prevention of spillovers occurring when competing buyer firms source from a shared supplier. The interview protocol was developed based on the variables and constructs of the conceptual model. Several scientific articles using similar or partly even the same variables and constructs were studied and considered before formulating the interview questions. The interviews contain mostly open-end questions to leave room for discussion and questions possibly coming up during the interview. An interview guide with standardized questions for all interviewees was used to ensure comparability of the collected answers (Appendix 2). Employees with different backgrounds, technical and non-technical, from different departments of the supplier firms were supposed to provide the researcher with insights from different perspectives on practices of knowledge and information exchange in relationships with buyers and protection of leakage. Hence, data for this research was collected by conducting semi-structured interviews with representatives from the operations department, marketing department, sales department, design and development department as well as the purchasing department of different supplier firms. The selected interviewees were informed in advance about this research by sending them information on this project via email, so they could prepare for the interviews.
19
Company Function Industry Duration Location
1 Norma A Team Leader Support Group
High-tech, e.g. defense, medical, aerospace
35 min Drachten, Netherlands
2 SGS B International Marketing Automotive 45 min Telephone interview 3 SGS B Key Account Manager Automotive 33 min Telephone interview 4 PUT C Strategic Purchasing Mainly Automotive 41 min Peine, Germany 5 PUT C Purchasing Mainly Automotive 24 min Peine, Germany 6 PUT C Manager Design &
Development
Mainly Automotive 55 min Peine, Germany 7 PUT C Senior Buyer Mainly Automotive 45 min Peine, Germany Table 5 Summary Interviews and Interviewees
After asking the respondents for their permission, the interviews were recorded and later transcribed. Drafts of the transcripts were sent via email to the interviewees for checking before they were used for coding.
Validity and reliability
To ensure quality, as well as validity and reliability of the data included in this research, the application of certain measures was taken into account. Based on Yin (1994), Voss (2009) created an overview of important tests, which is adapted and shown below. The third column of the table illustrates the measures taken in this research to ensure validity and reliability of the collected data.
Test Definition Case study tactic
Construct validity Extent to which correct operational measures are established
-multiple sources of evidence (triangulation, multiple interviewees from different departments of different firms) -interviewees check draft transcripts after the interview
Internal validity Extent to which a causal relationship can be established, with showing that particular conditions lead to other conditions
-pattern matching and explanation building to obtain knowledge from data -transcribe interviews thoroughly -address rival explanations
External validity Generalizability of findings -replication logic in multiple case studies
Reliability Extent to which the study can be repeated with obtaining the same results
-case study protocol (appendix 1)
-case study database (appendix 2) -records, transcripts, clarification by interviewees
Table 6 Reliability and Validity in Case Study Research (based on Yin (1994, 2009) and Voss (2009))
3.5 Data Analysis
20 was chosen, implying the aim of generating new theory emerging from the data. Strauss and Corbin (1990) suggested a coding scheme consisting of three steps that was followed by many researchers and also is applied in this research. The first step is open coding and involves the fragmentation of data followed by categorizing them into concepts. Concepts are fundamental and basic building blocks of theory. Open coding involves the identification and development of these concepts as well as defining their dimensions. Words, phrases, or sections of the transcripts that seemed to be relevant were labeled. After data has been labeled, it has been fragmented and regrouped into sub-categories, which consist of observations, sentences or ideas. Sub-categories are grouped and together form categories. The second step is axial coding and deals with setting up data in new ways by regrouping and connecting categories with each other, for instance by putting them together under an overarching theme. The last step is selective coding and includes choosing a core category and relating it to the remaining categories. The coding tree showing the main categories found is part of the case study database (Appendix 2). The formed categories and the links between them form together the main findings of this research.
The coding process also served the reduction of the data. Thereafter, data was further examined. Within-case analysis of the interaction between variables and categories is performed to receive a more precise understanding of characteristics and patterns of each case (Eisenhardt, 1989). Patterns revealed were further compared with other cases searching for cross-case patterns. This is a key step in case research and essential for the generalizability of findings and conclusions drawn from the cases (Eisenhardt, 1989; Voss, 2009), and contributes to the main result of this research.
4. ANALYSIS
This research includes three different case companies and aims to analyze how they apply different governance mechanisms in buyer-supplier relationships trying to prevent spillovers regarding knowledge and technologies, product market information, supplier development as well as how resources and capacities are handled and managed when cooperating with different firms. Before analyzing governance mechanisms applied by buyer and respectively supplier firms, firstly results on risks of spillover occurrence identified by the case companies will be illustrated. The identification and presentation of potential spillover risks aims to enhance the reader’s understanding on why and in which cases certain governance mechanisms were chosen by the different case companies.
4.1 Spillover Risks
21 what was also recognized earlier in literature (Cassiman & Veugelers, 2002; Isaksson et al., 2016; Todo et al., 2016). Interviewees perceived multiple competing firms sourcing from one supplier can lead to risks for spillovers to occur. The supplier, also serving competing firms, could act as a channel transmitting information and knowledge, willingly or unwillingly between buyer firms. Table 7 summarizes and categorizes situations and settings that were identified during the interviews as including potential spillover risks along the different types of spillovers.
Table 7Overview of Codes and Spillover Types
22
Supplier Buyer
Figure 2 Information and Knowledge Exchange Between Supplier and Buyer
The exchange of knowledge, information, expertise etc., as illustrated in Table 7 and Figure 2, is crucial for buyer-supplier relationships. However, it could be subject to spillovers when not treated carefully and confidentially by the involved firms.
During technical conversations, for instance, buyer and supplier exchange relevant product specifications and develop ideas for potential solutions. Buyer and supplier compare product and production specific knowledge, technical data and information (A, B) and sometimes also prototypes (see Figure 2). Company C sometimes even engages in common R&D projects with suppliers where each firm’s expertise is exchanged to either develop new tools together or aim for winning a customer tender (customer request for creating a solution for a new product). Furthermore, company C closely works together with its suppliers during projects for customers, where know-how is exchanged and the firms support each other in their respective areas of expertise. A drawback of this cooperation and project work is that multiple departments with different tasks, responsibilities and know-how need to be involved for the different processes of projects. This implies that the information, exchanged between buyer and supplier as well as sub-suppliers, need to be accessible for multiple employees (company C), or at least the project team (company A). The knowledge and information exchange between buyer and supplier is important to develop the best possible solution for the buyer product. Buyer firms often also share technical drawings of their products containing sensitive information on technical data and product design while suppliers hand sample parts and prototypes to buyers to be tested by them. However, this also comes with the risk of leaking of sensitive information and data. Though in the past negative experiences almost never occurred to the case companies, company B experienced that a customer receiving a sample part claimed patent on the material/product idea of company B. Another aspect is that often employees do not only work for one buyer firm but are responsible for multiple customers, which might be competitors, and therefore represent a potential danger of information and knowledge spillover. These employees need to be very careful with the knowledge and information they receive.
All case companies stated that the guarantee that knowledge, information or data they share is safe and does not spread is never given. Especially the co-development of products with a customer and project cooperation entail mutual sharing of sensitive data and knowledge. In different phases buyer products are at the supplier site and a means through which useful information could leak to competitors
- product specific information and knowledge
- product technical data - product technical norms - technical drawings - models/prototypes - expertise, experiences - knowledge on production - production methods - own know-how
- new material developments - technical knowledge on material and production solutions
- sample parts
- expertise, experiences
23 visiting the supplier site. With customer visits at the supplier site, sometimes even on short notice, it is not always possible to hide the product and the knowledge and information it is containing, in particular when the product is still in production (company B, C). Thus knowledge as well as product market spillovers to competing firms could happen at the supplier site.
The case companies have not experienced a lot of supplier development, but rather support from their customers regarding information sharing on products and material, operations, audit preparation support and general support. Buyers often accept that developments of cooperation, experience exchange and insights the supplier receives can be used for other customers of the suppliers. Thus, there is controlled spillover of supplier improvement efforts, which applies for case companies B and C. Company A has no experience with any efforts taken by its buyers.
Resources and capacity are the last source of spillover risks to be discussed. There is no strict allocation of supplier’s resources and capacity between different buyers. All case companies use their machines and tools for multiple customers and no parts of the production hall are assigned to a particular customer. The only exception is a financial involvement of a customer in a machine or product, which guarantees him at least some exclusive use. The internal organization of orders, assigning responsibilities to employees regarding orders and customers is done by the supplier firm.
4.2 Governance and Prevention of Spillovers
The interviews revealed how supplier firms apply and buyer firms perceive the use of the four governance mechanisms as defined by Liu et al. (2009), as well as alternative mechanisms to overcome the risks and prevent different kinds of spillovers.
Contracts
Contracts and contractual agreements were found to be a dominant governance mechanism for protection against spillovers. At the beginning of a relationship different contracts and agreements between case companies and their customers are concluded. Their purpose is to gain mutual understanding of the business relationship and, further on the treatment of data, information and knowledge exchanged within the relationship.
24 Table 8 Contract Types
At the beginning of a relationship firstly non specific contracts are signed, such as a general contract between the firms, containing all general regulations, the code of conduct and responsible contact persons. Next to that, general terms of delivery are discussed and signed on regulations of orders and product deliveries. The most important agreement regarding the prevention of spillovers is the Non-Disclosure or Confidentiality Agreement relating to the confidential treatment of exchanged knowledge, information and data between the firms. There is often a general confidentiality agreement at the beginning of the relationship (see Appendix 3, example from company C), and later also specific ones applying to certain projects or products with more strict rules concerning the treatment of documents, data and R&D information to protect sensitive information.
25 production of customer products. According to company B customers regularly update contracts and adjust them as a reaction to past experiences.
Specific project or product regulations are documented in project contracts, development contracts on mutual product development, which are often very rough, production regulations and sometimes special, exclusive contracts for nonstandard products, which give a firm exclusivity in obtaining a certain nonstandard product from a supplier.
Company A mentioned that one of its main customers uses very strict contracts and agreements, having an agreement prohibiting the duplication or sale of a product produced by company A, as well as any cooperation with competitors of the customer. Furthermore customers of company A make use of a test document, which determines company A’s use of the customer’s investment.
The acceptance of contracts and agreements, especially the Confidentiality Agreement, is a stringent requirement to start a business relationship. According to company C contracts and agreements are the most dominant governance mode as they ensure the highest protection against spillovers and suppliers can be prosecuted in case of any leakage. Thus, contracts support the supplier in decreasing the risk and occurrence of spillovers.
Transaction-Specific Investments
According to most interviewees the purpose of investments is to expand production capacity and improve efficiency, e.g. by reducing costs or increasing the speed of production. Based on the data obtained from the interviews transaction-specific investments can be grouped into supplier and buyer investments. Firstly supplier investments will be addressed, thereafter investments undertaken by buyer firms.
The interviewees explained that customers often expect their suppliers to invest in machines and tools. Investments undertaken by suppliers are mostly more generally applicable to multiple customers. As investments made by their firm interviewees mentioned investments in machines, machine improvement, tools, employee training and site-specific investments such as site-specific infrastructure investments. Because of the rather low degree of transaction specificity supplier investments are beneficial and can be used for multiple customers, which implies that they rather increase the risk of spillover occurrence as products of multiple customers ‘meet’ at the new investments where knowledge and product information can spill over.
26 The only investments and support undertaken by company C in its suppliers are investments in tools specific to company C needs and training to improve knowledge and operations of company C’s suppliers. Furthermore, company C and its suppliers sometimes mutually help each other to improve machines and thus efficiency of production. The training is partly product-specific and partly concerns general organization of processes and operations, which the supplier could also use for other firms, thus it is object to spillovers.
Interviewees from all case companies emphasized that customer investments are under the ownership and control of the investing firm implying dependency and inflexibility of the supplier regarding the use of this machine or tools. The interviews revealed that it is usual that suppliers only use tool and machine investments for the investing customer products. According to one interviewee “Customer investments are selfish. Customers simply invest to ensure own production and supply, or to increase capacity and production quantity. We are not allowed to use their machines or tools for anything el se except for the production of their products.”. This statement counts for all case companies.
Though customer investments are regarded as being selfish they can support the prevention of spillovers as with the exclusive use of one machine the production for the customer is, at least to some extent, separated from the production for other customers at the supplier site. The investing firm prevents spillovers by claiming exclusive use, which also helps to prevent knowledge and product market spillovers occurring from use of the same machines for competitor products. Therefore investments with a higher degree of transaction-specificity are regarded as supporting the prevention of spillovers while investments with general applicability as non-supporting spillover prevention. From this it can be concluded that supplier own investments are less transaction-specific and therefore can be object to spillovers, while buyer investments often are highly specific, exclusively used and therefore positively influence the prevention of spillovers.
Relational Norms
The governance mode of relational norms was hardly to be found at the case companies. According to the interviewees, most norms on behavior are included in contracts and agreements, such as confidentiality, and customers expect suppliers to act accordingly. However, for most case companies, there is also a code of conduct with norms expected from the firms such as loyalty and honesty. Further, the interviewees stated that there were no defined compliance rules, but behavior and atmosphere with different suppliers is highly influenced by the respective firm and its employees. In company A some relational norms are defined internally – “We as a company try to act in a loyal and honest way with all our customers, and made it our aim to apply the Golden Rule in all our business.”.
27 Interviewees from company C explained they often have to fill out a questionnaire from the customer where, among other aspects, statements and their standards regarding relational norms and behavior have to be ticked and accepted. In case the customer is unsatisfied with the questionnaire results he will discuss this with company C. In general, company C tries to behave in a friendly, ethical way avoiding conflicts. Company C emphasizes open communication and firms in relationships to talk openly about problems and cooperate. Cooperation and loyalty within a supplier relationship are important to company C to ensure a common sense of mutual caring. At some suppliers company C has a preferred status, which means the supplier favors orders and requests from company C helping company C to compete successfully against competitors on the market. Moreover, loyalty and cooperation were defined as unwritten rules in buyer-supplier relationships.
All interviewees agree that in general relationships with customers are friendly and cooperative, however, the norms are highly influenced by the customer, the respective department and employee with whom they have to cooperate. Thus, within the case companies some relational norms were found. However, those affecting confidentiality and relevant norms to prevent spillovers are written down and fixed by means of contracts and agreements.
Trust
According to an interviewee, trust means for company C “the belief in each other, the other’s capabilities and loyalty with the partner in good as in bad times”. Interviewees of all companies state that in general they trust their customers and feel a basis of trust given in each relationship with their customers. However, levels of trust between buyer-supplier relationships differ. Multiple factors were found that influence the trust level between firms positively, which are the length of the relationship, past (positive) experiences, regular personal contact, meetings and visits, personal relationship, openness especially regarding early problem reporting, help and support provided, honesty especially regarding advice, support to improve the other firm’s performance, loyalty also in challenging times, supplier reputation, supplier competencies, satisfying delivery conditions and finally quality and accuracy of the delivered goods. With high-level suppliers or partners, with whom company C has a closer relationship, the trust level is higher compared to normal-level suppliers.
Interviewees of company C state that trust can be helpful in the relationship with suppliers and is an important decision criterion in case products of two suppliers are equal in technical quality and price. Furthermore, trust is highly important for suppliers participating in R&D projects where very sensitive data is dealt with, which would highly harm company C when leaking and becoming public. Thus, company C only cooperates in research projects with suppliers it trusts most.
28 and product they are involved with to protect every exchange. Another interviewee from company B said “We always use written agreements and contracts, everything in the relationship with our customers is fixed, nothing is left open.”.
Until a few years ago company C did not have Confidentiality Agreements on every project or document shared with suppliers as they trusted them. However, some of their largest customers forced them to use Confidentiality Agreements for everything they share with their suppliers, information, knowledge, data, documents etc.
In general trust is said to have a positive influence on relationships and thus to support the prevention of spillovers. However, with the high level of pressure and competition present in the industry firms prefer to hedge by means of contracts and agreements, and therefore trust as a governance mechanism is hardly to be used for protection against spillovers; firms want to avoid any potential risk and prefer the use of governance mechanisms with higher levels of protection.
4.3 Alternative Mechanisms for the Prevention of Spillovers
The interviews also revealed alternative mechanisms applied in buyer-supplier relationships to control for and prevent spillovers. Firstly alternative mechanisms applied by suppliers will be introduced before turning to the mechanisms buyers use.
One identified spillover risk were products at the supplier site, which would be seen by competitors visiting the supplier. In order to protect products lying at the supplier site being means through which spillovers could occur, some suppliers hide products during competitors’ visit. In case this is not possible, for instance, because the product is still in production, product labels with detailed information on the product composition and technical data, are turned around. Being afraid that this would not help, company C once invented a fake product name and printed this on the product label of products at the supplier site, to prevent visiting competitors receiving information by reading the product label. Furthermore, all case companies only allow controlled site visits and always escort visitors, and, if necessary or wanted by competing firms e.g. by using a product publicity prohibition, circumvent parts of the production area.
A major customer of company C even created a plan together with company C, a so called security zone concept, with marked sensitive areas, where, for instance, not even cleaning ladies are allowed to be without supervision (see appendix 4). This customer also required that certain areas of company C’s site have limited access and can only be entered by authorized employees with chip cards.
After having negative experiences, company B provides regularly training to its employees regarding aspects of confidentiality, information and knowledge sharing. This training is supposed to raise awareness of company B’s employees on confidentiality, sensitivity of data and support their handling of relationships with customers regarding confidentiality and exchange of information.
29 their (company B’s or company C’s) customers audit them. The audit process includes very extensive controls of the suppliers, among others visiting suppliers and interviewing multiple supplier employees, which might take up to half a year. The audit process is thought to reveal whether suppliers meet necessary standards and requirements, and whether they can become trustworthy partners.
Interviewees from company C also mentioned having to fill out questionnaires before the start of a business relationship with customers. These questionnaires contain statements regarding confidential treatment of data as well as other conditions and terms on sharing of knowledge, information etc. the customer provides within the relationship, which they have to accept by ticking a box. Only then customers cooperate with company C. This mechanism is similar to the governance mode “contracts”, however it can be distinguished from contracts as for some statements company C has different options to choose from.
Another mechanism applied more often by larger customers from all case companies is a portal system. Only some employees from the case companies have access to it, however only to a limited amount of data and documents. The customer sends personalized log-in dates and codes to selected employees, enabling them to enter the system. The portal system is an expensive IT system created by customers, not only facilitating data sharing but also protecting data and information electronically exchanged between customer and case company better from hacker attacks and unauthorized access. Further, an interviewee from company B pointed out that due to country differences the risk of spillover is higher in some countries his firm is operating in. Therefore company B applies different, country-specific security and protection standards and does not share sensitive data and information with business partners from certain countries.
30
Application Classification Mechanism
Supplier Mechanisms Supplier Site Mechanisms
Hiding Products Hiding Product Labels Fake Product Name
Product Publicity Prohibition Controlled/Limited Site Visits Special Competitor Visit Conditions Buyer & Supplier Mechanisms Security Zone Concept
Coaching Employee Training
Buyer Mechanisms
Country-Specific Protection Rough Data Sharing
Keeping Information and Data Secret Conscious Supplier Choice Partner Choice
Audit Contract Supplement Questionnaire IT Protection Portal System Communication, Reminding
Conversations Personal Contact Reminders/Indications Awareness Raising Table 9 Alternative Spillover Prevention Mechanisms
4.4 Patterns on Governance and Prevention of Spillovers
32 5. DISCUSSION
5.1 Spillover Risks
The interview data revealed that the supplier site is very prone for spillovers to occur. Multiple firms sourcing from the same supplier find their products, knowledge, data, innovation and R&D being brought together to one location lying in close physical proximity to each other. This poses risks of leakage and transfer between buyer firms, and can be detrimental to these firms, in particular when they compete against each other on the market.
Although suppliers perceive customer investments to be selfish because they restrict the supplier’s control and flexibility on the use of machines, these investments can support spillover prevention. Customer investments in highly specific machines imply exclusive use of this machine for this customer’s production and thus the customer’s production is separated from the supplier’s remaining production. This physical separation can help prevent leakage, for instance by competitors not passing by this machine as their products are produced elsewhere at the supplier site. Moreover, customer investments, such as machines, are often unique as they are tailored to the customer’s products’ needs and specifications implying a high level of asset and transaction specificity. This prevents any abuse for production of other firms’ products. From this it can be concluded that customer investments, being tailored to customers’ products’ needs and specifications, are a means for spillover prevention:
Proposition 1. Customer investments being tailored to customers’ products’ needs and specifications
are a means for spillover prevention. The higher the level of asset and transaction specificity of a customer investment, the higher the safeguard against spillovers.
5.2 Governance and Prevention of Spillovers
33 Figure 3 Importance of Governance and Alternative Mechanisms for Spillover Management
The case companies focus and highly rely on the governance mode contracts when trying to prevent spillovers to competitors. Also transaction-specific investment, the governance mode with the second highest protection, is the second most used governance mode in the prevention.
During the interviews it became obvious that although other governance mechanisms could also support the prevention of leakage, most firms wanted to safeguard and protect their information, knowledge, data and research shared within buyer-supplier relationships using contracts, in particular confidentiality agreements. This can be explained by the fact that contract is the governance mode with the highest level of protection and the lowest level of reliance. Knowledge and technology as well product information are very sensitive to the buyers and their leakage, especially to competitors, is devastating for the firm as it could mean losing a competitive advantage and market position. In highly competitive and tense industries, such as the automotive industry, protection of innovation, R&D, knowledge and other company advantages, is of utmost importance for the firms to compete on the market, assert their market position and survive.
Proposition 2. The higher the competitive tension and pressure of the industry, the more firms tend to
rely and focus on transactional governance mechanisms to protect against leakage and spillovers.
