How does competition influence sustainability decisions made by upstream and downstream managers?

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How does competition influence sustainability decisions made

by upstream and downstream managers?

Master thesis, MscBA, Supply Chain Management University of Groningen, Faculty of Economics and Business

March 29, 2019 Marijn Wes Student number: S3001180 E-mail: M.Wes.1@student.rug.nl Supervisor dr. ir. N.J. Pulles Co-assessor prof. dr. D.P. van Donk

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Abstract

Purpose: The purpose of this study is to investigate if competitive pressure negatively affects the sustainable decisions of upstream and downstream managers. In addition, this paper tries to explain the differences between the sustainable decisions of upstream and downstream managers and why these occur.

Methodology: Two separate studies are conducted, a vignette study and a qualitative study. The first question is answered with the vignette study that is conducted with upstream and downstream managers. The second question is answered with the qualitative study that uses semi-structured to gather the necessary data.

Findings: The results from the vignette suggest that the sustainable decisions of downstream managers are positively influenced by high competitive pressure. When downstream

managers make unsustainable decisions they share this information with the customer more often. High competitive pressure has no effect on upstream sustainable decisions. However, the data from the qualitative study suggests otherwise. Sustainable decisions of upstream and downstream managers are negatively influenced by high competitive pressure when the financial means to be sustainable are at risk.

Practical implications: Understanding the effect of competitive pressure on the sustainable decisions of upstream and downstream managers and why this occurs aids in tackling environmental and social impacts.

Originality/contributions: This study investigates why unsustainable choices are made instead of focusing on reducing unsustainability. Besides that, the focus of this study is to investigate the effect of competitive pressure on the sustainable decisions of upstream and downstream supply chain managers. This provides a more in-depth analysis of the

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1. Introduction

Over the past decades, companies experienced a shift from the belief that they exist only as an economic entity towards the assumption that companies have social and environmental responsibilities (Ho, Wang, & Vitell, 2012). This shift is explained by the growing concern over social and environmental issues like child labor and global warming (McWilliams & Siegel, 2001). As a result, more companies have increased their resources to pursue sustainable goals (Bové, D’Herde, & Swartz, 2017). However, companies are far from accomplishing truly sustainable supply chains (Pagell & Shevchenko, 2014). A sustainable supply chain can increase a company’s performance (Ortas, Moneva, & Álvarez, 2014), but sustainability is not fully adopted by companies. Recent examples are the Volkswagen scandal and Nike using child labor at one of their factories (Blackwelder, Coleman, Colunga-Santoyo, Harrison, & Wozniak, 2016; Veit, Lambrechts, Quintens, & Semeijn, 2018). Interestingly, these scandals can be related to the supply chain. Nike’s scandal is a sourcing problem that occurred upstream and Volkswagen happened downstream with the customers. But what drives supply chain managers to make these unsustainable decisions? Additionally, what direction of the supply chain, upstream or downstream, is more susceptible to make unsustainable decisions?

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6 managers related to sourcing (Bai & Sarkis, 2010; Giunipero, Hooker, & Denslow, 2012), and by decisions of downstream managers related to the customer (Sheth, Sethia, & Srinivas, 2011). In addition, upstream and downstream managers experience pressure from a unique set of competitors (Markman, Gianiodis, & Buchholtz, 2009; Sarkis, Zhu, & Lai, 2011). But, could this result in differences in how they experience competitive pressure and how does this reflect on their sustainable decisions?

Current literature suggests that competition can have a negative influence on

sustainable decisions (Bennett et al., 2012; Kilduff, Galinsky, Gallo, & James Reade, 2016). It seems plausible that upstream and downstream managers, in a competitive market, can be negatively influenced by competitive pressure. Current literature does discuss downstream competition, but most studies focus on individuals in non-profit organizations (Kilduff et al., 2016) or lack explicit focus on sustainability (Bennett, Pierce, Snyder, & Toffel, 2013;

Kilduff et al., 2016). However, Fernández-Kranz & Santaló (2010) did focus on sustainability but they only focused on downstream competition and mentioned that the results are still conflicting. Upstream competition is still unexplored in the current literature (Markman et al., 2009). This study tries to address the gap in the literature about the effect of competitive pressure on sustainable decisions. In addition, this study tries to differentiate itself by trying to understand the underlying reasons how competitive pressure influences upstream and

downstream manager differently. Upstream and downstream managers experience pressure from distinct sets of competitors (Markman et al., 2009; Sarkis et al., 2011) and this could determine how competitive pressure influences their sustainable decisions. This leads to the following research questions:

i. How does competitive pressure influence sustainable decisions of upstream and downstream managers?

ii. How do these decisions differ between upstream and downstream supply chain managers, and why?

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7 study contributes to the current literature by focusing on sustainability, and upstream and downstream competition. To further develop the knowledge of this effect, a comparison is made between upstream and downstream managers and how competitive pressure influences their sustainable decisions.

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2. Theoretical background

This chapter discusses the relevant literature. The concept of sustainability is explained followed by competition. This provides input for the hypotheses developed in chapter 3.

2.1. Defining sustainable supply chain management

The topic of sustainability is becoming more interesting to businesses and is getting more attention in the literature. Sustainability is frequently described as fulfilling the present needs without jeopardizing the needs of future generations (Brundtland, 1987). The topic of sustainability has gained popularity and there are many studies that research the factors that can influence sustainability. Sustainability nowadays is more complex because of the trend of globalization and global competition (Hsuan, Skjott-Larsen, Kinra, & Kotzab, 2015). Consequently, the number of studies on sustainability lead to many different definitions as every study focused on a different dimension of sustainability (Glavič & Lukman, 2007). The majority of research focused on how companies can become more sustainable instead of focusing on how they can create a truly sustainable supply chain (Pagell & Shevchenko, 2014). This study will focus on how unsustainability is caused in the supply chain, therefore, the definition of Pagell & Wu (2009) is adopted. They define sustainable supply chain management as a “[s]upply chain that would at worst do no net harm to natural or social systems while still producing a profit over an extended period of time; a truly sustainable supply chain could, customers willing, continue to do business forever” (Pagell & Wu, 2009, p.38).

2.1.1. Triple bottom line

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9 substances of supply chains (Glavič & Lukman, 2007). The social dimension refers to social responsibilities like health and safety (Glavič & Lukman, 2007).

2.2. Defining competition

The search for competitive advantage is a constant process where companies try to outperform their competitors. Globalization has increased the intensity and scale of competition substantially (Ralston, LeMay, & Opengart, 2017). The major focus of research is the impact of prices (Dafny, Duggan, & Ramanarayanan, 2012). Competition can be defined as a “[d]ynamic situation that occurs when several actors in a specific area (market) struggle for scarce resources, and/or produce and market very similar products or services that satisfy the same customer need” (Osarenkhoe, 2010, p. 345).

2.2.1. Downstream competition

Downstream supply chain management refers to all activities that relate to the customer (Osarenkhoe, 2010). Downstream supply chain management can be defined as “individuals directly involved in the downstream flow of products, services, finances, and/or information to a customer” (Mentzer et al., 2001, p. 4). When firms compete downstream, it refers to the processes and decisions downstream the supply chain where companies compete through marketing practices and creating the most value for the customer (Osarenkhoe, 2010; Vance, 2006). Downstream competition occurs when products are substitutable (Syverson, 2004b). This competition downstream can function as a disciplinary mechanism for managers to put the success of the company before their own private benefits (Boubaker, Saffar, & Sassi, 2018). Contrary, high pressure from the competition can decrease the profit margins and discourages managers (Dhaliwal, Huang, Khurana, & Pereira, 2014)

2.2.2. Upstream competition

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10 that hires key logistics personnel from Amazon (Ellram et al., 2013). Because of globalization, competition can come from numerous directions and increase competition over the same amount of resources that are available (Ellram et al., 2013). This increases the risk that raw materials become unavailable. A recent example of this can be seen in the fishing industry where competition over certain types of fish became too high and this decreased the amount that could be caught by each competitor (Pomeroy, Parks, Mrakovcich, & LaMonica, 2016). The type of resources does not need to be valuable, rare, inimitable or non-substitutional to provoke competition (Markman et al., 2009). Upstream competition is essential for downstream competition to be effective (González & Kujal, 2012). The margin that is acquired upstream is reduced by downstream competition. The difference between upstream- and downstream competition is that companies know their downstream competitors and monitor them (Ellram et al., 2013). However, the actions of upstream competitors are often overlooked because companies do not always recognize all the resources that support the competitive advantage (Ellram et al., 2013). Furthermore, competitors that do not compete downstream are often overlooked as upstream competitors (Hunt & Davis, 2012). This makes upstream competition more unexpected as competition can appear from different directions (Ellram et al., 2013).

2.2.3. Pros and cons

Competition is often associated with positive effects. For example, competition between companies can lead to economic efficiency and improve customer wellbeing and stimulate innovation (Ford & Håkansson, 2013; Syverson, 2004b). On the other hand, competition can also have negative effects and discourage innovation because competitive pressure depletes the expected returns of the innovation (Aghion & Griffith, 2005). Competition can lead to competitive pressures where companies need to make a trade-off between being sustainable and their competitive advantage (Kilduff et al., 2016). For example, Bennett et al. (2013) found that the pressure from competitors can negatively influence decisions when a competitor is more appealing to the customer. In addition, competitive pressure can also increase the fear for individual employees of losing status (Kilduff et al., 2016). The result is that managers are more willing to alter their decisions when the pressure from the competition becomes too high.

2.2.4. Competition and sustainability

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3. Hypotheses development

Chapter three consists of hypotheses development. First, section 3.1 will focus on the effects of competition on sustainability. Next, section 3.2 will focus on upstream and downstream competition, what the differences are and how this affects sustainability.

3.1. Effects of competition on sustainability

Economic benefits are often more important than environmental and social sustainability. It can be expected that competitive pressure influences the decisions, and this reflects on the sustainable dimensions. This expectation is derived from previous studies that identified competition as a driver of unethical behavior (Kilduff et al., 2016). For example, when the competition was higher, illegal kickbacks were provided to purchasing agents to improve performance. Furthermore, the study of Aghion & Griffith (2005) showed that competition does not always improve innovation. Competitive pressure impacts the return of investments of these innovations and thus discourages sustainable initiatives. Financial sustainability is most important, a price difference between the focal company and a competitor could be a competitive advantage. Sustainability does not always lead to cost reductions and this initiative could increase the price of the final product (Simpson & Wickelgren, 2007). Bennett et al. (2012) concluded that not pursuing sustainable initiatives could lead to lower prices and thus increase customer value. In conclusion, high competitive pressure could lead to less sustainable decisions as this increases the costs and could increase the difference with the competitor. When managers experience high pressure from competition, they need to make a trade-off between sustainability and economic benefits. They will probably choose for the economic benefits and thus financial sustainability because the literature suggests that financial sustainability is most important to managers and high competition could decrease profitability. Hence, this leads to the following hypothesis:

H1: High competitive pressure has a negative effect on sustainable decisions.

3.2. Downstream versus upstream competition

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3.2.1. Upstream competition and sustainability

Upstream competition can be unexpected and disruptive and decisions are often made on the short term (Ellram et al., 2013), while sustainability focusses on the long term (Dyllick & Hockerts, 2002). Upstream sustainable decisions on a short term increases costs, does not provide immediate financial benefits and can erode competitiveness (Giunipero et al., 2012). Purchasing sustainable materials is expensive and increases product costs. Therefore, upstream managers are often more profit-oriented and these are not aligned with long term sustainable goals (Giunipero et al., 2012). Upstream competition can increase the costs and hurts the profitability (Ellram et al., 2013). Sustainable decisions are often expensive and when competitive pressure increases the costs upstream managers can decide to abandon their sustainable goals to keep the overall costs low. This can be seen in the clothing industry. Upstream managers have problems when it comes to sourcing and it often relates to social sustainability (Mohan Das Gandhi, Selladurai, & Santhi, 2006). The industry is improving its reputation, but there are still competitors that produce in third world countries and other companies follow to achieve low-cost mass manufacturing (Farrer & Fraser, 2011). Competition needs to follow to stay competitive (Mohan Das Gandhi et al., 2006). Hence, it can be expected that competitive pressure influences the sustainable decisions of upstream managers. When competitive pressure is high, it can be expected that it has a negative effect on sustainability. When competitive pressure is low, there is no fear of losing anything to the competition. It can be expected that low competitive pressure has a positive effect on the sustainable decisions of upstream supply chain managers.

3.2.2. Downstream competition and sustainability

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14 on sustainability because e.g. the risk of losing customers to the competition is too high. Low competitive pressure has a positive effect on sustainability as there is e.g. no risk of losing customers to a competitor.

3.2.3. Difference between upstream and downstream competition

Upstream managers experience fear of losing sources or suppliers and need to make short term decisions when competitive pressure is high. Downstream managers experience the risk of losing customers when competitive pressure is high. However, literature suggests that there is a difference between upstream and downstream managers and how they experience competition. That is because they experience pressure from a unique set of competitors (Markman et al., 2009; Osarenkhoe, 2010). Major strategic decisions, for example, product innovation, are often made upstream and then flow downstream where it is implemented (Vance, 2006). The benefits acquired upstream need to be high because they are reduced downstream (González & Kujal, 2012; Simpson & Wickelgren, 2007). Unfortunately, upstream competition is less transparent than downstream competition and could reduce these benefits. This could reflect on the sustainable decisions made upstream. Upstream competition is more disruptive and unexpected (Markman et al., 2009) and the decisions of upstream managers are often made on a short term (Ellram et al., 2013). As sustainability often focusses on the long term, the question arises if these short-term decisions of upstream managers influence sustainability. In conclusion, it can be expected that high competitive pressures impacts the sustainable decisions of upstream managers more than the sustainable decisions of the downstream managers. Consequently, low competitive pressure has a positive effect on the sustainable decisions of both upstream and downstream managers. Because both managers experience no pressure from competition that can decrease profitability. So, there is no pressure that influences their decisions on sustainability. This leads to the following hypothesis:

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4. Study 1: Scenario-based experiment

As explained in the introduction, this thesis consists of two studies. The purpose of study 1 is to find if the level of competitive pressure in a market can influence the sustainable decisions made by upstream and downstream managers. This study tries to answer the

following research questions:

i. Does competitive pressure influence sustainable decisions of upstream and downstream managers?

ii. Do these decisions differ between upstream and downstream supply chain managers?

In order to answer these questions, a vignette study is conducted. The vignette study enables statistical testing for the relationship. This chapter will discuss the methodology, explains why the sample is chosen and how data is collected from this sample. Finally, how the data is measured will be discussed.

4.1. Methodology

The hypotheses that were developed in chapter 3 can be tested with the use of a vignette study. The vignette presents a hypothetical situation and the responses of the participants reveal their values, social norms or perceptions. Other factors can influence the hypotheses and vignettes make is possible to focus on one factor and eliminate the others. Vignettes are ideal when studying the decision making process of upstream and downstream supply chain managers (Wainwright, Gallagher, Tompsett, & Atkins, 2010). It provides a simulated situation in order to see the manager’s reaction. The main purpose of the vignettes are to manipulate the intensity of competition and to study how managers are affected by it (Evans et al., 2015). Short textual vignettes make it possible to do compare groups (Hughes & Huby, 2004). The groups that are compared in this study are the upstream and downstream supply chain managers. The vignettes measure how the sustainable decisions of these two groups are affected by the intensity of the competition. With the results, a comparison can be made and this provides an answer to the second research question.

4.1.1. Vignette design

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16 versions for upstream and downstream managers are available and multiple vignettes improve the accuracy of the answers. Each respondent received two cases. One that addresses the social dimension and the second addresses the environmental dimension of sustainability (Table 4.1). Respondents answer questions about how likely they act in certain scenarios based on a Likert scale from 1 to 7. The vignettes are manipulated by changing the intensity of the competition. There are different versions of the vignettes available for both upstream and downstream managers. An overview of the different vignettes can be found in table 4.1.

Version Downstream respondent Upstream respondent 1 High Comp/EnvSoc/Down High Comp/EnvSoc/Up 2 High Comp/SocEnv/Down High Comp/SocEnv/Up

3 Low Comp/EnvSoc/Down Low Comp/EnvSoc/Up

4 Low Comp/SocEnv/Down Low Comp/SocEnv/UP

Table 4.1: Overview of the questions and measurements

This decreases the variability that can influence the decisions and make it useful for

measuring. The data from the vignettes can help to answer if competitive pressure influences the sustainable decisions of upstream and downstream supply chain managers. The vignettes can be found in Appendix A.

4.1.2. Sample and data collection protocol

The vignettes are distributed in business to business firms among professionals that have a function related to upstream or downstream supply chain management. The data is collected by four researchers and combined in a shared database. The researchers are conducting similar studies and use the same vignettes with the same professionals in a

business to business setting. To prevent bias, the participants are not informed about the intent of the vignette and what this study tries to measure. After the vignettes are completed it will be told what the actual purpose of the vignettes is. Participants can ask questions to the

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4.1.3. Data analysis

After conducting the vignettes, the results are put into excel and added to a shared database. The statistical analysis was conducted with the use of IBM SPSS Statistics 25. independent-samples T-tests are conducted to measure the effect of competition on

sustainable decision making and how this reflects on the upstream and downstream managers. The sample consists of 27 upstream and 29 downstream supply chain managers. Table 4.2 provides an overview of the characteristics of the participants.

Table 4.2: Overview of the characteristics of the participants

Table 4.3 provides an overview of how the effect of competition on the sustainable decisions is measured.

Construct No of items Supply chain Purpose Measurement

Information sharing

3 Downstream Likeliness to share information about an unsustainable supplier with the customer under different competitive pressures.

Measures the effect of competitive pressure

Sourcing 3 Upstream Likeliness to source from an unsustainable supplier under different competitive

pressures.

Measures the effect of competitive pressure Manipulation

check

2 Both Questions about the intensity

of the competition. Measure if the manipulation of the case is successful. Hawthorn check

2 Both Questions about the strategy

of the firm in the case and the importance of securing supply

Checking if there is no additional manipulation

Table 4.3: Overview of the questions and measurements

Characteristic Downstream Upstream

No. of participants 29 27

Gender Male: 90% Male: 70%

Female: 10% Female: 30% Average age 43 40 Function Purchaser 3% Purchaser 70%

Supply chain manager 24% Supply chain manager 7%

Marketing 7% Marketing 19%

Sales 55% Other: 4%

Production: 3%

Other: 7%

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4.1.4. Cronbach’s Alpha

To measure the internal consistency of the constructs, a Cronbach’s Alpha test is conducted. This measure how a set of items are related to each other as a group. Table 4.4 provides to data related to the Cronbach’s Alpha.

Table 4.4: Results of the Cronbach’s Alpha test

To measure if the items are measuring the same construct, the Cronbach’s Alpha needs to exceed 0,7. Sourcing for upstream managers and sharing information for downstream

managers have excellent internal consistency and reliability. The Cronbach’s Alpha measures unidimensionality of a set of items and a larger number of questions inflate the value of alpha. Hence, to make sure that the items of the construct represent one thing a factor analysis is conducted. Table 4.5 provides the data related to the factor analysis.

Table 4.5: Results of the Factor analysis

All items show strong correlations and the answers of the respondents can be averaged into two new variables: “SourcingMean” and “InfosharingMean”.

4.1.5. Manipulation check

The purpose of the vignettes was to manipulate the intensity of the competition by providing a low competition scenario and a high competition scenario. Before the answers of the upstream and downstream managers can be compared, a manipulation check is required to make sure that the manipulation of the competition was done correctly. An independent-samples T-test is conducted to compare the mean values of the manipulation checks. An overview of the results can be found in table 4.6. Check 1 measures if participants are aware of other parties are actively trying to buy from the same source or sell to the same customer. Check 2 measures if participants think that there are a lot of competitors active in the market.

Construct Upstream Downstream

Sourcing 0,933

Sharing information 0,930

Downstream Upstream

Information sharing Sourcing

Item 1 0,892 Item 1 0,963

Item 2 0,785 Item 2 0,969

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Table 4.6: Results and significance of the manipulation checks.

The significance of both tests is smaller than 0,05 for both upstream and downstream managers. Hence, the manipulation of competition was successful and the vignettes can be used to compare the answers in high and low competitive pressure.

4.1.6. Hawthorn check

The manipulation of competition was successful, but to make sure no other manipulations are present in the vignette study a Hawthorn check is conducted. Check 1 measures the importance of securing supply or customer. Check 2 measures the quality of the strategy. The Hawthorn checks are measured with the use of an independent-samples T-test. Table 4.7 provides an overview of the results and corresponding significances.

Table 4.7: Results and significance of the Hawthorne checks.

The significance of all the test is greater than 0.05, which means that there are no significant differences and the respondents do not experience other manipulations than competitive pressure. Hence, the Hawthorne checks are successful.

Low pressure High pressure

M M t df sig Manipulation check Upstream Check 1 3,53 5,42 4,511 50 0,000 Check 2 3,20 5,00 3,738 52 0,000 Manipulation check Downstream Check 1 3,43 6,04 5,899 44 0,000 Check 2 3,30 5,50 5,229 45 0,000

Low pressure High pressure

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20 4.2. Results

This section provides the results of the vignette study and explains the different tests that are done.

4.2.1. Competitive pressure and sustainable decisions

To test H1 and H2, an independent-samples t-test was conducted to compare the sustainable decisions of upstream and downstream managers in high and low competitive pressure. The results are presented in table 4.8. This shows a comparison between the likeliness of the actions of upstream and downstream managers, when making an unsustainable decision, in high and low competitive pressure.

Table 4.8: Comparing the sustainable decisions of upstream and downstream managers in high and low competitive pressure

There are no significant differences when comparing the use of an unsustainable supplier (SourcingMean) in high and low competitive conditions. This suggests that competitive pressure does not have an effect on the sustainable decisions of upstream supply chain managers. There are significant differences when looking at the sustainable decisions of downstream supply chain managers. “InfosharingMean” has a significance that is lower than 0.05. Downstream managers significantly share information more often when competitive pressure is high compared to when the competitive pressure is low. Thus, competitive

pressure has a positive effect on the downstream supply chain managers. This contradicts the hypothesis. The sustainable decisions of downstream managers are more affected by

competitive pressure than upstream managers, but this has a positive effect.

4.2.2. Conclusions

The goal of the vignettes was to provide statistical evidence to test the hypothesis: H1: High competitive pressure has a negative effect on sustainable decisions.

H2: Upstream managers are more negatively influenced by high competitive pressure than downstream managers.

It seems that the results contradict H1. The sustainable decisions of upstream managers are not influenced by competitive pressure and the sustainable decisions of

Construct Low pressure High pressure

M M t df sig

SourcingMean 4,03 4,40 0,76 52,00 0,453

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5. Study 2: Qualitative study

Study 1 researched what the effect of competitive pressure is on sustainable decisions. Study 2 enriches study 1 and attempts to find how competition affects sustainable decisions and why the decisions from upstream and downstream managers differ. This study tries to answer the following research question:

To answer this question, a qualitative study is conducted to find the underlying reasons for the phenomenon. Previous studies were mostly quantitative research (Bennett et al., 2012;

Fernández-Kranz & Santaló, 2010) and there is still much debate on the effects of competitive pressure on sustainability. Study 2 tries to understand how and why there is a relationship between competitive pressure and sustainable decisions and adds this to the debate. An explanation of why the sample is chosen and how data is collected from this sample will be provided. Finally, how the data is measured will be discussed.

5.1. Methodology

A qualitative study is conducted which provides a more in-depth insight. The goal is to answer how sustainable decisions differ between upstream and downstream supply chain managers, and why. The vignette study only provides linear relationships if competitive pressure influences the sustainable decisions of upstream and downstream managers.

Qualitative research determines why this is happening in a real-life setting and provides richer data on the underlying reasons within the phenomena. The qualitative study compares two groups, upstream and downstream managers, and tries to explain why competition influences their decisions and what the differences are. Because little is known about the negative effect that competition has on sustainability, a qualitative study might introduce unexpected results that provide directions for further research. Topics that are discussed in the interview are related to how their decisions are influenced by competition, how this reflects on

sustainability and the differences between upstream and downstream.

5.1.1. Selection criteria

The unit of analysis in this study are professionals that have an upstream or downstream supply chain management or related function. Four interviews, with two

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23 research question. This provides a stronger basis for the explanation of the relationship and answers can be compared to see the differences and similarities between upstream and downstream supply chain managers.

The interviewees need to meet certain criteria. Firstly, the selected professionals need to be related to upstream or downstream supply chain management. Secondly, the

interviewees need at least two years of experience in the field of the supply chain to provide proper insights. Finally, the selected professionals need to value sustainability and work towards achieving sustainable goals. Managers that do not value sustainability are less likely to have experience with sustainability or have strong opinions about it. Overall, four

interviews are conducted in this study. Table 5.1 provides an overview of the interviewed professionals and Table 5.2 provides the characteristics of the companies from which the interviewees originate.

Selection criteria Down 1 Down 2 Up1 Up2

Supply chain function Supply chain manager Supply chain manager Strategic global purchaser Majority shareholder

Experience 3 years 7 years 10+ years 35+ years

Sustainability Yes Yes Yes Yes

Table 5.1: Interviewees and selection criteria

Characteristics Company A Company B Company C

Interview Down 1, Down 2 Up 1 Up 2

Industry Food and beverages Packaging Logistics

Business system B2B B2B B2B

Size 450 3000 350

Table 5.2: Company characteristics

5.1.2. Data collection

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24 not shared with the participants as this could change the outcome of the interview. The

interviews started with explaining the purpose and that the answers are completely

confidential and could be reviewed. Next, some general questions about the interviewee and general questions about competition and sustainability. This part provides a good introduction for the rest of the interview and could provide valuable insights. Part two and three are the main part about the interviewees experience with competitive pressure, how this influences their sustainable decisions and how this compares to their colleagues (upstream or

downstream). The structure of the interview can be found in Appendix B.

5.1.3. Data analysis

The interviews were recorded by using a mobile phone after the interviewees gave their consent to be recorded. This allows for an accurate understanding of what has been said. The recordings were transcribed afterward and kept in a single database. The recordings along with the notes from the interviews provide a basis for the in-depth analysis (Karlsson, 2009). Table 5.3 provides an overview of the duration of the interviews. After transcribing the interviews, the results are compared and analyzed. The interview protocol in appendix B shows how the interview is divided into three parts and each part of discusses one topic. This keeps it manageable to analyze the answers for each question and compare the results with the other interviews. The main purpose of the analyses is to find how the interviewees think competitive pressure influences their sustainable decisions. Secondly, how they think upstream and downstream managers differ and their sustainable decisions when faced with competitive pressure. The different views are discussed in the results and several quotes of these managers will be used in the results section.

Interview Function Duration Interview

Downstream manager 1 Supply chain manager 72:30 minutes Downstream manager 2 Supply chain manager 28:20 minutes Upstream manager 1 Strategic global purchaser 61:09 minutes Upstream manager 2 Majority shareholder 39:44 minutes

Table 5.3: Overview of the interviews

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25 5.2. Results

The objective of the qualitative study was to investigate how sustainable decisions of upstream and downstream managers differ when influenced by competitive pressure, and why. This provides an answer to the second research question. The results are different from the results in study 1 and this will be discussed in chapter 6. It is expected that upstream and downstream managers react differently to competitive pressure (Markman et al., 2009; Sarkis et al., 2011). Besides experiencing pressure from a unique set of competitors, upstream and downstream managers have different incentives when it comes to value maximization and acquiring a large margin (Sarkis, Gonzalez-Torre, & Adenso-Diaz, 2010). This could determine how competitive pressure influences their sustainable decisions.

5.2.1. Upstream decisions and competitive pressure

It seems that the sustainable decisions of upstream supply chain managers are influenced by competitive pressure. Competition depletes the financial means to be sustainable. “I had a supplier that performed better on sustainability, but we could not increase the costs to keep that supplier. The competition had an influence on this decision because the price needed to go down to stay competitive” (Upstream manager 1). Secondly, in some markets, the customer looks for the lowest price. This could be achieved by using less sustainable sources. “When the competitor offers lower prices because they use unsustainable sources we need to follow them to stay competitive” (Upstream manager 2). Hence,

competitive pressure does have a negative effect on the sustainable decisions of upstream managers as they have fewer resources to make sustainable purchases. This translates to less environmental and social sustainable purchases by choosing cheaper unsustainable suppliers. “Competition can lead to theme’s, like environment and education of people (social), to be forgotten” (Upstream manager 1). These themes’ often lead to a rise in costs and this is spread out on a longer period because sustainability is a long term goal. “Competition is not always good for these long term goals (Upstream manager 1)” and this view is shared by all the interviewees.

5.2.2. Downstream decisions and competitive pressure

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26 by cost reduction, not by their sustainable goals. This ultimate goal of reducing the costs can also negatively influence sustainability when competitive pressure is high. Downstream manager 2 provided an example: “When you make a product that produces less CO2, but is 10% more expensive and a competitor does the opposite. Then the final customer will

probably choose the less expensive option”. As this company sells to e.g. businesses that sell paint, the market could be a factor. Downstream manager 2: “when the economy is stable, customers choose more organic products. But, for a can of paint...”. Downstream managers are driven by costs and the customers, in their market, choose the least expensive option. This option is provided by the competitors and this leads to unsustainable decisions to reduce the costs and be competitive. However, downstream managers do make their unsustainable decisions more transparent when competitive pressure is high. “From an economic

perspective and because this decision needs to be made quickly, I would decide to choose the unsustainable supplier (Upstream manager 2). Upstream manager 1 proposed that “especially when the competitive pressure is high, then I (as a downstream manager in his current job) make my less transparent decisions more transparent to the customer”. Upstream manager 2 explains further: “At the beginning of the year, there is enough budget to invest in the supplier and make them more sustainable. However, at the end of the year, there are not enough financial means to do so. You do make your decisions more transparent to the customer and at the end of the year, you discuss with your customer how you want to be sustainable or what needs to change in the coming year. At the beginning of the year, I only focus on maximizing my financial gains with the customer.”. Hence, at the beginning of the year, unsustainable decisions are not transparent to the customer as companies still try to invest in the supplier. At the end of the year, there are less financial means to invest in the supplier. Companies make these decisions more transparent and the discussions with the supplier are different compared to the beginning of the year. To maintain a good relationship and to gather goodwill, the downstream managers discuss with the supplier what went good and wrong last year and look to the future.

5.2.3. Differences between upstream and downstream managers.

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27 price of the product and getting it for the cheapest price. They are not interested in

sustainability” (Upstream manager 1). Furthermore, the downstream manager who sells a product is responsible for the whole product and the upstream managers just for one or more parts of that product. The downstream managers provide input about the sustainability

requirements of the customer to the upstream managers. The upstream managers are normally focused on the price and the downstream managers try to include sustainability demands that will increase the costs. “The intent of the upstream managers is to be sustainable, but the customer downstream must be willing to pay for the costs of sustainability and this is not always the case” (Upstream manager 2). Hence, downstream supply chain management is leading when making sustainable decisions. Their customers need to be willing to pay for sustainability in order to purchase from more sustainable sources.

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28

6. Discussion

The studies that are conducted in this paper shows several interesting results and these will be discussed in this section. First, the results of study 1 will be discussed followed by the results of study 2 and finally a comparison of the two studies.

6.1. Discussion study 1

The goal of the vignette study was to find if competitive pressure has an effect on the sustainable decisions of upstream and downstream managers. Previous studies have shown confliction results on this topic (Fernández-Kranz & Santaló, 2010). Competition can have a positive effect on sustainability because competition can move companies to invest in efficient production, improve customer wellbeing, lower prices and stimulate innovation (Acquaah, 2003; Ford & Hãkansson, 2013; Syverson, 2004a). But, competition can also lead to unsustainable decisions (Bennett et al., 2012; Kilduff et al., 2016). The results of study 1 showed that there is no significant difference between the sustainable decisions of upstream managers in relation to competitive pressure. However, the results do show a significant difference between the sustainable decisions of downstream managers in relation to competitive pressure. High competitive pressure makes the decisions of downstream managers more sustainable when they experience high competitive pressure.

The positive effect of competitive pressure on the downstream sustainable decisions is surprising. It was expected that downstream managers are more likely to withhold information about an unsustainable supplier from their customer when competitive pressure is high. They risk losing the customer to a more sustainable supplier when they decide to make

unsustainable decisions, and when this does not comply with the sustainable goals of the customer. This would be in line with the results from the study of Bennett et al. (2013) and losing customers can put the survival of an organization at danger and the pressure of the competition can lead to unsustainable decisions (Nill et al., 2004). However, downstream managers could also behave more honest because sustainability is becoming more important to businesses, and thus the customer (Rajeev, Pati, Padhi, & Govindan, 2017). Downstream managers could be driven to resolve the unsustainable problem with the customer. In doing so, mitigating the risk of losing the customer when they find out that their supplier supplies unsustainable products.

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29 expected that upstream managers would be negatively affected by competitive pressure and more than downstream managers. There is, however, a small effect but not significant. It seems that upstream managers make on average slightly more unsustainable decisions when competitive pressure is high. An explanation could be that upstream managers are more re-active as their function is more tactical and aimed at short term actions to deal with pressure from the competition (Farmer, 1984). But, sustainability focusses on the long term (Dyllick & Hockerts, 2002). This could make upstream managers less likely to actively pursue

sustainable goals and it could explain why differences in competitive pressure did not affect their values for sustainability.

6.2. Discussion study 2

Study 1 researched if competition had an effect on the sustainable decisions of upstream and downstream managers. Study 2 tried to understand the reasoning behind these decisions and how the sustainable decisions of upstream and downstream managers differ. The results from study 2 seem to conflict the results from study 1 as the sustainable decisions of upstream and downstream managers are both negatively influenced by competitive

pressure.

Downstream competition puts pressure on the financial means to be sustainable. This leads to more unsustainable decisions when competitive pressure is high. Competition downstream often revolves around the approval of the customer. Customers could seek out competitors that are not working towards sustainability as this influences the price. This is in line with the findings of Bennett et al. (2013), who found that the customers are leading in the decisions of upstream managers. When the customer does not want to pay the price for

sustainability they choose the cheaper competitor. This leads to more unsustainable decisions of downstream managers to stay competitive. They need to lower their prices and a way to do it is to put sustainable investments on hold.

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30 focus on a short time period. In addition, upstream managers value high margins because the margins are reduced by the activities downstream (González & Kujal, 2012; Simpson & Wickelgren, 2007). The margin is also reduced by sustainable initiatives (Bennett et al., 2013), and competition who puts pressure on the price (Ford & Hãkansson, 2013). This makes upstream managers more tempted to lower to the purchasing costs (Porter, 2006) and this reflects on their sustainable purchases because sustainability is increasing the price.

The difference between upstream and downstream supply chain managers is that downstream supply chain managers focus more on sustainability. Downstream managers try to create more value for the customer through marketing practices (Osarenkhoe, 2010; Vance, 2006). They do this by making sustainability part of the decision criteria of the customer. Downstream managers map the needs of the customer, try to provide more value with sustainability and provide this as input for the upstream supply chain managers. Upstream managers try to acquire parts for the cheapest price and focus less on being sustainable. This would align with the findings of Porter (2006), who found that upstream managers are more focused on lowering the purchasing costs. In addition, the results also align with the study of Bennett et al. (2013), who argued that the customers do business with competitors if the price focal company is too high. Sustainability is one of the factors that could increase the price.

6.3. Overall conclusion

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31 environmental and social sustainability first. Better understanding of what causes

unsustainability aids in the creation of fully sustainable supply chains (Pagell & Shevchenko, 2014). The results show that competition is an important factor that influences sustainability.

6.4. Limitations and future research

Study 1 and 2 have several limitations. First, the number of participants in study 1 are limited and this makes it possible that study 1 is dependent on a few companies. Second, the design of the vignettes could be a limitation as it describes a scenario where managers do business with a foreign company and this could be an unknown scenario for respondents. Third, the respondents could be biased when filling in the vignettes as the unsustainable choice could be viewed as an unpopular choice. Causing managers to provide answers that do not resemble their actual decision. Fourth, the participants in study 2 are also limited and how they value sustainability could differ when conducting the interviews with participants from a different firm and market.

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32

7. Conclusion

The aim of this research was to discover how competitive pressure influences the sustainable decisions of upstream and downstream supply chain managers. This lead to the following research questions:

i. Does competitive pressure influence sustainable decisions of upstream and downstream managers?

The conclusion for study 1 is that competitive pressure positively influences the sustainable decisions of downstream managers and does not influence the sustainable decisions of upstream managers. However, study 2 revealed that competitive pressure does play a role when upstream and downstream supply chain managers address sustainability and the results show a negative effect. The reasoning behind the results of study 2, is that competitive pressure influences the financial means to be sustainable and managers need to make a tradeoff between being competitive and achieving sustainable goals. The needs and

willingness of customers to pay for sustainability are leading. Because of this, downstream supply chain managers are more focused on sustainability than upstream supply chain managers. Downstream supply chain managers try to use sustainability for the creation of value and improve their competitiveness. The upstream supply chain managers focus more on the price. The findings are in line with previous studies that also found contradicting results. Hence, there is no definitive proof of how competitive pressure affects the sustainable decisions of upstream and downstream managers.

The findings can help managers to better tackle the social and environmental impacts within their supply chains. It was found that competitive pressure can negatively influence sustainable decisions of upstream and downstream managers because competition depletes the financial means to be sustainable. Before setting sustainable goals, managers should address and map the number of competitors and assess the level of pressure. This helps with setting realistic sustainable goals in highly competitive markets. Continuously reassessing the level of competition aids managers to efficiently allocate financial resources to cope with

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33

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Appendix A

(upstream)

Casus 1

Bedankt voor uw deelname aan dit onderzoek. Dit onderzoek richt zich op beslissingen in supply chains. Er worden twee scenario’s aan u voorgelegd, gevolgd door enkele vragen. Het

onderzoek zal ongeveer 15-25 minuten van uw tijd nemen.

Er zijn geen goede of slechte antwoorden. We vragen u om de vragenlijst in te vullen op een manier die het beste past bij hoe u zou handelen in het gegeven scenario. Uw antwoorden worden strikt vertrouwelijk behandeld. Onderzoekers van de Rijksuniversiteit Groningen

zullen de gegevens beheren en anonimiseren.

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39 Beschrijving casus 1: BatteriesCo

Introductie van het bedrijf

U bent de supply chain manager van BatteriesCo, een toonaangevende accufabrikant voor de auto-industrie. BatteriesCo levert accu’s aan enkele van de grootste autofabrikanten, waarvan de meeste grote plannen hebben voor elektrische auto's. Een van de grootste klanten van BatteriesCo heeft onlangs aangekondigd dat ze vanaf 2019 alleen elektrische auto's gaan produceren. BatteriesCo breidde daarom zijn productiecapaciteit voor autoaccu’s uit en heeft ambitieuze groeiplannen bekendgemaakt.

Binnen BatteriesCo bent u als supply chain manager verantwoordelijk voor het inkopen van metalen. Een van jouw belangrijkste uitdagingen van BatteriesCo is de aankoop van

voldoende hoeveelheden metaal om te kunnen voldoen aan de toenemende productie van accu’s. Metalen zoals lithium, nikkel en kobalt worden in enorme hoeveelheden gebruikt bij de productie van accu’s van BatteriesCo, maar vooral nikkel is bijzonder moeilijk te

verkrijgen.

De nikkel supply chain

Als supply chain manager kocht u altijd nikkel uit Australië. West-Australië bezit ongeveer een derde van de reserves aan nikkel in de wereld. Australië is daarom een van 's werelds grootste nikkelproducenten. Met de toename van het aantal elektrische auto's dat wordt verkocht, is de vraag naar metalen voor de productie van autoaccu’s echter exponentieel gegroeid en is het steeds moeilijker geworden om een stabiele voorraad nikkel uit Australië te verzekeren. Als gevolg hiervan kon de supply chain van BatteriesCo de toenemende vraag niet bijbenen. Hierdoor moest het productieniveau van de nieuwe productielijnen van accu’s worden teruggebracht tot 80%. Dit is een belangrijke zorg voor het topmanagement van BatteriesCo.

U krijgt de opdracht van de CEO van BatteriesCo om snel een oplossing voor dit probleem te vinden. Op de korte termijn zou de enige oplossing zijn om samen te werken met een grote Aziatische producent van metaal: AsiaMining. AsiaMining is een belangrijke smelterij en raffinaderij van koper en nikkel. De afgelopen jaren hebben ze zwaar geïnvesteerd in mijnen en smelterijen in de Filippijnen en Indonesië. Net als Australië hebben deze landen

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40 vervuilender voor het omliggende ecosysteem. In de gebieden rond die mijnen is ontbossing een groot probleem, waterbronnen zijn vervuild en luchtmonitoringsystemen wijzen op hoge concentraties van giftige stoffen. Desondanks voldoen de mijnen in de Filippijnen en

Indonesië aan de milieuwetgeving van de lokale overheden.

U weet uit de rapporten van een van uw bedrijfsanalisten dat een andere grote koper AsiaMining heeft benaderd. Net als BatteriesCo is deze andere koper op zoek naar grote voorraden nikkel. AsiaMining heeft niet voldoende capaciteit om aan de vraag van zowel BatteriesCo als de andere koper te voldoen. Vandaar dat als AsiaMining zakendoet met de andere koper, het geen zaken zal doen met BatteriesCo.

Zakendoen met AsiaMining lijkt de enige oplossing te zijn om aan uw vraag naar extra nikkel te voldoen. Met het nikkel afkomstig van AsiaMining, kan BatteriesCo zijn productie van autoaccu’s opschalen en voldoen aan de productiegroei die wordt gecommuniceerd naar klanten.

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41 Beoordeel de volgende stellingen over uw beslissing om nikkel af te nemen bij

AsianMining

(1 = nee, helemaal mee oneens tot 7 = ja, helemaal mee eens)

Schaal

Helemaal Helemaal

oneens eens

Waarschijnlijk zal BatteriesCo inkopen doen bij AsianMining BatteriesCo zal bij de productie gebruik maken van nikkel uit de Filippijnen en Indonesië

BatteriesCo zal gebruik maken van de mogelijkheid om samen te werken met AsianMining

Hoe waarschijnlijk is het dat u over dit besluit rapporteert aan ... (1 = helemaal niet waarschijnlijk tot 7 = zeer waarschijnlijk)

Schaal Helemaal niet Zeer waarschijnlijk waarschijnlijk ... uw directe collega's ... uw leidinggevende / manager ... uw ondergeschikten

Beoordeel de concurrentie voor nikkel in de supply chain van BatteriesCo (1 = nee, helemaal mee oneens tot 7 = ja, helemaal mee eens)

Schaal

Helemaal Helemaal

oneens eens

Andere kopers zijn actief op zoek naar vergelijkbare hoeveelheden nikkel van AsiaMining

Er is een hoge mate van concurrentie voor nikkel van AsiaMining Beoordeel de volgende stellingen

(1 = nee, helemaal mee oneens tot 7 = ja, helemaal mee eens)

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42

Helemaal Helemaal

oneens eens

Het verzekeren van voldoende voorraden nikkel is van groot belang voor het succes van BatteriesCo

De groeistrategie van BatteriesCo is een goede strategie

4 4 4

2

How does competition influence sustainability decisions made by upstream and downstream managers?