Tuesday, February 14, 2012

Corporate Strategy and Policy

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Restructuring and change have characterized the American automobile industry in the past decade. Over-capacity, increasing customer requirements, tougher environmental legislation and rapid technology development were among the most important factors behind this massive development. To stay competitive, car manufacturers and their suppliers therefore needed to continuously improve their performance. As a result more integrated relations have been developed between the powerful manufacturer and the dependent supplier. The vertical relation has changed, towards an outsourcing of activities to specialized suppliers, allowing the big companies to focus on their core competencies. But since outsourcing means that important activities are placed outside the boundaries of the firm, extended cooperation was needed to ensure efficient coordination of these activities. This requirement has forced car manufacturers to bring the relation with their suppliers to new levels (von Corswant, 00).

The question that remains unanswered though is how the suppliers may benefit from these close partnerships. The suppliers still see themselves at a disadvantage, considering that the gains of the relationship are clearly tilted in favor of the buyer. They feel that buyers use their bargaining power to force the close partnership and to increase profit, reaping the benefits themselves without sharing them with the suppliers. Totally dependent on their, in many cases, single customer, suppliers believe that creating gains in this collaborative agreement is becoming harder and harder and soon the negative effect of these strategies will reverberate through their entire organization.

This paper tries to see where is the relationship between the buyer and the supplier heading to, and to investigate the sources of cooperative gain for suppliers in a context of close vertical partnership and to identify strategies that may help the suppliers to enforce these gains. Another important idea that would be analyzed in the second part of the paper is if these strategies that theoretically may help the supplier benefit more from the close partnership are viable or not. The close but adversarial model of the American automobile industry may limit the ability of the suppliers to implement these strategies. And therefore the question that arises is whether suppliers are able to implement this new type of relationship with their main customers.


Pushed by world-class competition, many U.S. automotive manufacturers are making strategic moves, often with reluctant suppliers, into untried and unexplored buyer-supplier relationships. These moves are in response to increased and successful foreign competition, reductions in product development cycle times, demands for better quality, and higher expectations from more discriminating and demanding customers

Viewed strategically, deciding on suppliers roles and relationships goes far beyond the simple matter of make or buy”. The issue today is how to position the firms manufacturing capability to maximize the benefits that can be derived from combining the strengths of their in-house skills and capabilities with the strengths of their suppliers. The outcome is five related strategic moves by original equipment manufacturers (OEMs) that have multifaceted implications for both buyers and suppliers. These moves involve

• more consensual, cross-functional team decision making;

• supply base rationalization;

• longer-term contracts and relationships;

• more outsourcing of professional and staff functions; and

• acquisition of components and subassemblies rather than individual parts.

The perspective taken here is that of voice versus exit [Hirschman 184]. Exit is associated with market governance, with arms-length and spot contracting between autonomous, rivalrous firms. When dissatisfied with performance, agents exit to the best alternative. While there are outside directors next to executive directors on boards, they act more as experts, or perhaps as lobbyists, than as instruments for influence on management by owners [Moerland 16]. Dissatisfied owners sell their ownership of firms. Activities are coordinated either by price in the market or by hierarchy within firms. Ownership of firms is subject to public trade on the stock market.

Voice, on the other hand, is associated with partly rivalrous and partly cooperative relations between firms connected in networks with more or less durable relations. When dissatisfied, agents voice it and try to eliminate their dissatisfaction in the course of ongoing interaction. There are many forms of governance between market and hierarchy. Ownership is in part shielded from public trade through private ownership, cross-ownership between firms, ownership by banks, shares with restricted tradability, and protection against takeovers. Owners of firms try to correct or otherwise influence managerial action through non-executive directors (either in a single or in a separate supervisory board).

The difference between the exit and voice systems is not limited to the external organization of ownership and relations between firms, but also applies to internal organization of relations between management and labor and between central management and management of divisions. It is embedded more widely in a societys institutional environment and arrangements [North and Thomas 17].

In the voice system, firms are oriented toward ongoing relations, within the firm as well as between the firm and its environment. There is more orientation toward teams rather than individuals, remuneration according to seniority, longer-term employment, and the sharing of competencies between divisions. This is based on an institutionally embedded view of communities of firms in trades or industries, with shared interests and arrangements for partial cooperation. In short in the voice system, human resources are seen as investments, rather than as inputs in a production function, and outside relations are seen as sources of information and competencies, rather than only sources of inputs and sinks of outputs. a voice system would seek to overcome the monitoring problem and to enter in debate with management about the appropriateness of investments. But this entails the need to cut through the problem of asymmetric information. The best way to do this is to recognize the legitimacy of the interests of other stakeholders when their interests are recognized, they are more willing to supply inside information, since there is a reduced need to withhold information to achieve aims that are considered illegitimate by the principal. From the owners perspective, there is a trade-off involved here between maximal shareholder value and ability to monitor by compromising on the first, one gains the latter.

The net benefit of this might be in doubt if there were no additional advantages involved. But openness between owners and other shareholders opens the way for more extensive pooling of information, for the sake of utilizing but also developing the competencies of the firm. One cannot help someone to improve his or her utilization of opportunities in markets and technologies and to develop competencies if information on aims, capabilities, and practices is withheld. Openness, achieved by mutual recognition of interests, also enables the provider of capital to have an inside view of any financial problems, whereby credit can be maintained in cases where in the exit system, for lack of inside information, the provider of capital has no alternative to cutting the credit.

This yields an altogether different view of the role of owners of the firm or their representatives (such as non-executive directors) from the view of exit-based systems of corporate control. Here, part of their role certainly is monitoring shareholder interest, in the exercise of voice. But from a wider perspective it also recognizes the legitimacy of other stakeholder interests, and another part is to act as gatekeepers and channels of communication in the flow of knowledge and competence between the firm and its environment.

Following these theories, several authors have realized that the suppliers can engage in a new type of relationship with their customer, a relationship from which they will benefit a lot more than in the conditions of the adversarial model imposed in the last decades. A useful framework for analysis was therefore developed and this one was the exit�voice dichotomy, originally proposed by Hirschman (170) and adapted to the case of buyer�supplier relations by Helper (187). In an exit relationship, a customer that has a problem with a supplier finds a new supplier. In a voice relationship, the customer works with the original supplier to resolve the problem. In a voice relationship (a) the supplier provides its customer with detailed breakdown of process steps; (b) the supplier believes there is a high probability of continued trading with its customer for more than three years; and (c) if a competitor offers a lower price, the supplier expects the customer to help it match the competitors effort. Many studies concerning this new strategy have focused though mainly on the perspective of the car manufacturer ignoring in many cases the other side of the relationship � the supplier. This paper tries to see how the suppliers feel in this type of partnership and even more whether they can “force” upon the car manufacturers this type of partnership, and whether the buyer is willing to accept the new terms. Considering the surveys of Helper and Sako, in the United States, suppliers with voice relationships with customers

• Receive 8 percent more awards from their customers;

• Have 1.5-percentage points higher market-share growth;

• Are 10 percent more likely to adopt JIT without a cost increase;

while in Japan, suppliers with voice relationships

• Receive 18 percent more awards from their customers.

• Are 50 percent more likely to adopt JIT without a cost increase.

According to the studies, in most cases, a voice relationship is more efficient, since the flow of information between the parties makes techniques such as value analysis and value engineering more effective. But despite its relatively proven success, the voice relationship is still a minor form of relationship in the American automobile industry. These voice suppliers constituted only percent in the United States and percent in Japan. Why? And how can we improve the way things work in the relationship to ensure not only a fair sharing of the benefits, but also to avoid the case where the feedback effects of suppliers’ competitiveness on the car manufacturers’ performance are negative?

When considering these theories, these questions and the trends in the American automobile industry, two things came into my mind knowledge sharing network and building trust. For years and years suppliers have feared that by transferring their proprietary knowledge, they will lose their bargaining power derived from the specificity of that particular asset. How could we then expect them then to start transferring even more technology or tacit knowledge to their customer? This brings us to the second issue of the problem � trust, or to be more precise lack of trust between the supplier and the car manufacturer. Decades of adversarial relations and the strong opinion that the car manufacturer will easily switch to another supplier if the opportunity arises have weakened the level of trust of suppliers in the car manufacturers.


When I discussed about the relational view approach, I said that the theory centers on the idea that the supplier can share its proprietary knowledge with the car manufacturer in exchange for other knowledge resources that could allow the supplier to dispose of greater benefits. Focusing therefore on the supplier’s perspective in this theory, it is evident that implementing the voice strategy, which relies on the relational sources of cooperative gain and their sharing inside the network, is not that easy as we would like to believe. The question is therefore whether the supplier can build this partnership and develop sustainable competitive advantage in the conditions which in the American automobile industry, for a long time it has been considered that a key requirement for the development of sustainable competitive advantage was the existence of isolating mechanisms to prevent duplication of tacit knowledge. The increased formal commitment between buyers and suppliers has created the model both for the transfer of tacit knowledge and for prevention of the duplication of proprietary assets. But this has not been accompanied by a corresponding increase in noncodified forms of cooperation between the parties and the voice strategy requires at least a hybrid commitment model between the car manufacturer and the supplier and this is inexistent at the moment since the social institutions are extremely weak in the American culture.

For instance, suppliers to the U.S. automobile industry have little expectation of being treated fairly by their customers; further, a large plurality believe that if a competitor appeared with comparable quality and a lower price, their customers would switch ‘as soon as technically feasible’, rather than working with them to match or better the competitor (see Helper, 11a). Thus, current attempts to increase informal commitment and trust are constrained by the existence of adversarial buyer�supplier relations in the past. Then how could they accept this strategy, giving up their proprietary knowledge? One good argument comes from the model of the Toyota network where suppliers find no difficulty in sharing and duplicating vital information for their competitive advantage.

Suppliers are motivated to participate because they quickly learn that participating in the collective learning processes is vastly superior to trying to isolate their proprietary knowledge. The knowledge sharing processes have, over time, also helped create a strong ‘identity’ for supplier believing that he belongs to the network, that he is in the group. Toyota’s strong tie network is well suited for the diffusion (exploitation) of Toyota’s production know-how (e.g., the Toyota production system) as well as the existing know-how that resides within its suppliers. The network is efficient at tacit knowledge transfers, because Toyota has created a highly interconnected, strong tie network with a variety of processes that facilitate knowledge transfers, with multiple pathways among members (effectively eliminating most structural holes). Eliminating the problem of the free rider, the suppliers feel as if sharing vital information does not make them vulnerable, but creates opportunities for them, opportunities they can benefit from. But, they are Japanese, they were part of the keiretsu culture for a long time, it their inheritance. But the American suppliers can do it too.

This can be demonstrated by comparing the response of U.S. suppliers to receiving Toyota consultants vs. receiving General Motors consultants. Most suppliers claimed that they would willingly open their factories to Toyota consultants for two reasons. First, they believed that the Toyota consultants were experienced and possessed knowledge that could be truly valuable to their plants. Second, they trusted Toyota to offer the assistance without demanding an immediate price cut in return for cost improvements. In contrast, many General Motors suppliers indicated that they would prefer not to have General Motors’ consultants (called PICOS teams) come to their plants. So, the suppliers are willing to implement the strategy and the premises already exist.

U.S. suppliers are already part of a supplier association where the type of knowledge exchanged is primarily explicit knowledge. The problem is that there is there is a weak social community and suppliers do not perceive a strong sense of shared purpose with other firms in the network. If in the case of Toyota, the Japanese car manufacturer gradually built strong bilateral relationships with suppliers through the one-to-one knowledge transfers (consultants) and the supplier association activities, suppliers beginning to receive valuable knowledge at minimal cost, in the U.S. industry case the initiative must come from the suppliers. Increasing their participation level in the network, suppliers may have access to other tacit information that may create a relational competitive advantage with a rapid knowledge acquisition.

Figure 1. Knowledge sharing network process.


But suppliers still do not trust the car manufacturer, and the entire voice strategy relies on an increased level of trust between the parties. Therefore, trust is an important issue to be taken into consideration in the implementation of the voice partnership.


When it comes to the American automobile industry many authors have identified the close but adversarial buyer�supplier relationship as the core of the vertical partnership between the two parties. This model consists of a framework of formal cooperation accompanied by noncooperative behavior. Within such a framework, the buyer will take advantage of competitive weaknesses of the suppliers to reap short-term gain. Further, traditional concerns of vulnerability will affect supplier relations, leading to attempts by the buyer to minimize dependency. Finally, because period-by-period profit maximization implies that all realizable gains will be attractive to the buyer, switching to a cheaper source will be just as likely in the case of a relatively important input as in the case of a relatively unimportant one.

Considering these aspects, authors have placed the type of commitment in the industry in the formal quadrant.

Figure . A typology of commitment


Given the relatively strong legal institutions and weak social institutions in the West, it is not surprising that initial cooperative efforts have focused on the formally enforceable mechanisms. The next step towards a voice strategy requires a hybrid framework where formal mechanisms become secondary to informal commitment requires active efforts in developing social networks. The development of trust can provide the basis for sustainable competitive advantage since it is extremely difficult to imitate. It follows that the competitive advantage obtainable from cooperative buyer�supplier relations will be greater in environments, which are hostile to cooperation than in environments where cooperation is the norm, and therefore, once developed in the traditional adversarial American automobile industry may lead to a sustainable competitive advantage.

Since the U.S. auto industry has been characterized by decades of adversarial buyer�supplier relations, authors suggest that the initial strategies must involve actions that are clearly mutually beneficial. By transferring the proprietary knowledge without concern for the possibility of duplication by other suppliers, the supplier may initiate a new type of relationship. The car manufacturer may acknowledge the increased vulnerability of the supplier but, instead of profiting from it, it may regard it as he next level of specific investment and feel a need for reciprocal relationship, offering more benefits to the supplier. Actions like these involving increased vulnerability are possible in the early stages, provided adequate safeguards, such as the mutual hostages. Authors find some evidence suggesting that high-trust relations have been developed in a minority of cases. It is an open question as to whether these high-trust relations are the exception or the beginnings of real change in Western buyer�supplier relations.

A firm may trust trading partners to refuse to break confidences and exploit vulnerabilities for a variety of reasons. Previous research suggests that trust in inter-organizational settings is likely to be produced through social relationships and embedded ties, or relationship-based trust, institutionalized processes or routines for fairly and reliably dealing with a partner organization, or process-based trust, or an alignment of economic incentives through hostages, or economic hostage-based trust.

a) Social/Embeddedness Perspective - trust emerges through social interactions between exchange partners. As the duration and intensity of interactions between transactors increases, we would expect bonds of attraction to develop and social sanctions to be more efficacious.

b) Length of Relationship - various scholars have suggested that trust takes time to develop and can only be built slowly over time (Sako, 11). It takes time for exchange partners to develop the concrete personal relations necessary to generate trust and discourage malfeasance. Higher levels of trust are believed to develop when information asymmetries are low and there is less behavioral uncertainty. Further, acquiring social knowledge through long-term interactions provides insights into the moral character of trading partners, thereby allowing transactors to screen more accurately for honest partners. Finally, when transactors engage in long-term exchange relationships, they develop a history together. Through long-term interaction, a social memory is created and transactors can achieve serial equity (equity/reciprocity over a longer period of time) rather than requiring immediate or spot equity. Thus, we would expect higher levels of trust to emerge in exchange relationships where the transactors have a long history of interacting.

c) Intensity of Relationship (Face-to-face Communication). Various studies have found that face-to-face interactions are likely to lead to the development of positive feelings of attraction. Further, cooperation and trust between individuals has been found to emerge in laboratory settings when individuals can see and talk to each other and engage in social interaction. Face-to-face communication has been described as having a high knowledge-carrying capacity because it presents immediate feedback opportunities and makes use of both visual and audio channels of communication. Thus, it is considered useful for developing trust because it offers more cues for interpreting a trading partners behavior and motivations.

d) Process-based Perspective. The process-based perspective differs from the relationship-based perspective in that the trust orientation that individuals in one firm maintain toward a trading partner is not based on personal relationships, but, rather on a set of institutionalized processes and routines employed at the partner organization. Thus, the process-based perspective recognizes that interorganizational trust may be built upon impersonal processes and routines that create a stable context for exchange. Individuals may come and go at the two organizations but the trust orientation will not be affected because trust is not based on individual relationships. One may logically ask what processes would likely influence supplier trust in a supplier-buyer relationship? Our interviews with automotive suppliers indicate that the buyers processes or routines for selecting suppliers as well as the buyers processes for responding to supplier problems (e.g., the extent to which they provide assistance to help the supplier fix problems and improve their operations) were processes that influenced the production of trust.

e) Buyer Assistance-giving Routines. For example, in the automotive industry, Toyota and Nissan have long maintained a division of internal consultants who are responsible for helping suppliers solve various technical and managerial problems on a regular basis. According to the suppliers we interviewed, the buyers processes for providing regular assistance to suppliers (in many cases helping suppliers fix operational problems) were likely to influence the degree of trust in the buyer. The rationale behind the trust-creating value of assistance-giving routines is that an auto makers offer of free assistance serves as a signal of goodwill and commitment because it suggests that the automaker is genuinely concerned with the well being of the supplier. Also, the assistance may be viewed as a signal that the giving party does not have opportunistic intent (is the honest type) and feels benevolently towards the receiving party.

f) Economic (Hostage-Based) Perspective. Transactors may also behave in a trustworthy manner due to credible commitments that they have made with a trading partner (Klein, 180; Williamson 18). Williamson (1) refers to this as calculative trust. For example, trading partners may make financial or investment arrangements (stock swaps, equity participation) that are purposefully designed to align their economic fortunes. These arrangements are often referred to as credible commitments or an exchange of hostages. There is a relatively large literature that suggests that stock ownership, in particular, aligns transactors incentives and may get them to behave in a more trustworthy fashion. However, stock ownership may produce trustworthy behavior that, over time, results in higher levels of trust of the non-calculative sort. In many instances, the stock tie acts as a symbol of the relationship, thereby encouraging individuals to develop a trust orientation towards the partner organization (Gerlach, 187). Shared equity may create conditions for informal trust to develop. Thus, partial equity ownership may build trust by both aligning the trading partners incentives and creating conditions for informal trust to develop.

United States. In the United States, continuity of relationship was the only variable significantly correlated with trust. The relationship between automaker assistance and trust was positive, but not significant. One plausible explanation for the lack of significance (offered by suppliers we interviewed) is that U.S. automakers have only recently been offering assistance to suppliers. As U.S. automakers provide increased assistance to suppliers, supplier trust may increase. Interestingly, the relationship between face-to-face contact and trust was slightly negative in the U.S. sample. Some U.S. suppliers claimed that they spent a considerable amount of their face-to-face interaction time with U.S. automakers on unproductive activities, such as negotiating contracts and assigning blame for problems. thus, quantity of face-to-face contact appears to be less important to developing trust than quality of communication (Roberts & OReilly, 174; Sako, 1). U.S. suppliers also offered a possible explanation for the lack of a relationship between length of relationship and trust. Many suppliers claimed that length of relationship did not have a bearing on trust. Indeed, some suppliers suggested that the longer they had worked with a particular automaker, the more time they had to learn that the automaker was not. to be trusted. Increases in time and experience with a particular partner may only mean that one can better trust ones own judgments about a partners attributes and behaviors--and this knowledge may indicate that the other party is not trustworthy. Homogeneity of attributes and characteristics between partners may lead to social knowledge which may allow parties to better understand and predict others patterns of behavior, thereby leading to. trust. However, interfirm diversity and differences on key attributes may result in social knowledge that lowers trust (Parkhe, 11).

According to this view, trust is a by-product of norms, embedded in social networks, and rarely brought about through purposeful action (Granovetter, 185; See Sabel, 1 for a discussion). If true, Japanese transactors should only be able to develop high levels of trust with other Japanese transactors embedded within the same social and economic network. A process-based perspective would suggest, however, that the ability to create trusting supplier relations is a function of the processes and routines employed by firms (perhaps fostered by a supportive institutional environment) that is transferable across national and cultural boundaries.

The question of how Japanese automakers were able to quickly develop trusting relationships with U.S. suppliers is an important one. An examination of these results in light of our hypotheses provides further insights into the determinants of supplier trust. First, we should note that stock ownership was not a factor in these relationships and thus we can rule out stock ownership as a determinant of trust in these relationships. Second, U.S. suppliers relationships with Japanese automakers were only of short duration, 6 years versus years with U.S. automakers. Clearly a long-term relationship is not a prerequisite for high trust. With regard to face-to-face contact, the sample engaged in 1475 man-days of face-to-face contact with Japanese automakers versus 1657 man days with U.S. automakers. On an absolute basis there are no significant differences. Further, these exchanges are conducted in the United States, an institutional environment that was not found to produce high trust in ways similar to the Japanese institutional environment. These findings suggest that high supplier trust can exist without embedded ties and without the support of community or society-wide norms.

Given the short-term nature of the relationships, there was not enough history to accurately assess the re-win rates of U.S. suppliers with Japanese automakers. However, in five cases where suppliers were faced with a model change, suppliers reported re-winning the business in each case. Moreover, our interviews with U.S. suppliers revealed that they believed that they would re-win their business with Japanese customers because Japanese automakers had told them that they would re-win the business if they performed well, and Japanese automakers had a reputation for not switching suppliers at the model change. Thus, suppliers had the expectation of a high degree of continuity in the relationship.

The variable that seemed to be particularly critical to the Japanese automakers ability to develop trusting relationships with U.S. suppliers was offering assistance. U.S. suppliers indicated that, compared to U.S. automakers, they received more assistance from Japanese automakers in reducing costs, increasing quality, and improving delivery. Some U.S. suppliers indicated that they received more help from the Japanese automaker than they felt they deserved given their short term relationship. They were surprised at the willingness of the Japanese automaker to send consultants, free of charge, to help them improve. As, Tom Luyster, V.P. of Planning for Summit Polymers, a supplier of plastic interior parts, stated,

I couldnt believe it but Toyota sent approximately -4 consultants every day for a period of -4 months as we attempted to implement Toyota Production System concepts in a new plant. They gave us a valuable gift [the Toyota Production System]. Naturally we feel indebted towards Toyota and view them as a special customer; they sincerely want to help us improve (Interview, November 1, 16).

This type of helping behavior on the part of Japanese automakers seemed to be the catalyst for creating, in Gouldners (16) terminology, a norm of reciprocal obligation.

Our interviews with U.S. suppliers revealed another important factor not explicitly captured in our model but related to the ideas of relationship/process continuity and embeddedness. U.S. suppliers indicated that one reason they did not trust U.S. automakers was because U.S. automakers were perceived as constantly changing management, personnel, and policies. One supplier executive described the problem as follows

We cannot trust U.S. automakers as much as Japanese automakers because whenever they bring in new management, we get a whole new set of procurement rules and policies. The rules of the game are constantly changing. With Japanese companies we dont seem to have the same problems, because their policies and personnel are consistent and stable (Interview, September 1, 1).

The predictable consequence of frequent changes in purchasing management and policies is that suppliers realize that implicit, and even explicit, promises made by the automaker may be broken when new management arrives.

Supplier executives indicated that the deleterious effect of personnel changes on interorganizational trust occurs not only at the management level, but at the buyer level as well. As one supplier executive put it,

Its not that I dont trust the person sitting across from me at [the U.S. automaker]. In fact, I may feel more comfortable with him than his Japanese counterpart at Toyota. I may trust him completely. But what I dont trust is that he will be sitting there a year from now. U.S. automakers are constantly rotating their people through purchasing (Interview, September 11, 1).

U.S. suppliers claimed that Japanese automakers were more trustworthy than U.S. automakers due to their lifetime employment and promotion from within policies which foster stability in personnel and policies. These data suggest significantly greater employment stability at the Japanese firms, both automakers and suppliers. Greater employment stability may lead to higher levels of supplier trust due to greater confidence that inter-organizational processes will not change, and embedded ties that develop between executives, thereby increasing the efficacy of social sanctions to deter opportunistic behavior. This may explain why we found embeddedness (length of relationship) to have a significant relationship with trust in the Japanese sample, but not in the U.S.

In summary, the ability of Japanese automakers to build high levels of trust with suppliers in the United States suggests, that the institutional environment may be less important than firm-level practices in influencing trust. An examination of the specific practices employed by the most trustworthy (i.e. Japanese) automakers suggests that they are effective at building supplier trust because they have created inter-organizational routines that serve as credible signals of long term commitment to suppliers. In particular, their assistance-giving routines (which signal a commitment to an ongoing relationship) and their supplier-selection routines (which promote continuity in the relationship) provide credible assurances to suppliers that the buyer is committed to the exchange relationship. These findings suggest that supplier trust may be based largely on trustworthy behavior that is institutionalized within the buying firms processes and routines.


Our findings indicate that supplier trust is highly correlated with stable and consistent buyer processes/routines that represent credible commitments, toward long term interactions-notably assistance-giving routines and supplier-selection routines that promote relationship continuity. Thus, our findings offer support for the process-based perspective. A high degree of stability of organizational personnel at both organizations may be necessary to produce relationship-based trust (embedded ties) as evidenced by the fact that length of relationship was only a predictor of trust in Japan. We found no support that trust can be produced through economic ties/hostages.

Indeed, the set of practices employed by Japanese firms-which we found were effective at producing high levels of supplier trust-are arguably the product of a distinctive national culture and a unique set of evolutionary and historical events (Nishiguchi, 14). However, the ability of Japanese automakers to build high levels of trust with suppliers in the United States suggests that the institutional environment may be less important than firm-level practices in producing supplier-buyer trust.

Finally, we should note that buyers (i.e. automakers) incur real costs in developing high trust supplier relations. These costs come in two forms. First, buyers must expend resources in providing assistance to suppliers. In 15, Nissan and Toyota supported large teams of more than 60 internal consultants to provide assistance to suppliers. Although Japanese automakers get a return on their investment in the form of more efficient suppliers, they still must incur the expense of maintaining a large staff of qualified individuals to assist suppliers. Furthermore, there is an opportunity cost associated with maintaining long term, continuous relationships with suppliers. The cost of maintaining continuity includes the opportunity cost of not taking advantage of ones suppliers and the loss of the opportunity to use lower cost suppliers if they came along. The fact that building supplier trust imposes costs on buyers suggests that trust-building behavior should be carefully considered with an analysis of both the costs and benefits.

These relationships are becoming more important because increased competition and higher paces of innovation call for close cooperation between industrial buyers and their suppliers. In these close cooperative relationships investments in relation-specific assets often take place. These relation-specific investments enhance capabilities for effective and efficient supply. For instance, close cooperation may enable a supplier to deliver components ‘just-in-time’ to a manufacturer. In many cases this is only possible if at least one of the firms concerned adapts its production and logistic processes to those of its partner. Close cooperation also helps firms to survive under a ‘regime of rapid innovation’ (Williamson, 185 14). If a manufacturer involves prospective suppliers at an early stage of the process of developing new products, delays in bringing the products to the market are avoided (‘early-supplier-involvement’). However, this kind of cooperation compels the manufacturer to adapt the product developed to the capabilities of the selected suppliers, and these suppliers have to invest resources without knowing with certainty if there will be a quid-pro-quo. These examples demonstrate that close cooperation, while enabling firms to better meet the requirements of increasingly competitive markets, also leads to higher levels of dependence. As a result of relation-specific investments, the transacting firms face the conditions of a bilateral monopoly, in which they are more or less ‘condemned’ to continue doing business which each other. If one of the parties is more dependent than the other, opportunistic rent-seeking behavior by the less dependent may be provoked . If both are equally dependent, costly haggling over inputs and outputs may occur (Williamson, 185 1). In both cases many of the advantages may dissipate. Thus cooperative buyer-supplier relations inevitably bear the seeds of conflict. To create dependence among your customers, various factors are suggested, such as investments in relation-specific assets, the importance of sales to a specific buyer relative to the total turnover of a supplier, and the relative position of supplier and buyer in a larger network. It is argued that these structural actors are important, but that also psychological factors have to be taken into account. The extent to which structural determinants lead to consequences for control mechanisms applied in the transaction relation (as hypothesized by, e.g., transaction cost economics) may be expected to be mediated by psychological factors, such as the level of trust in the other party. Extending the analysis of supplier-buyer relations to include also psychological factors is important, because it helps making these theories more realistic and managerially relevant. Management decisions shape interorganizational relationships, and managers act on their perception of the environment rather than on some objective rendering of structural factors. In this paper we will not try to ascertain which psychological factors impact on the relationship between structural situational factors and the way in which managers shape buyer-supplier relations.

In much of the literature on industrial buyer-supplier relations, the focus is on explaining the forms these relations assume on the basis of structural characteristics, like investments in relations-specific assets. Organizations are no natural phenomena, but man-made artifacts. Therefore, structural situational characteristics can only have consequences for characteristics of interorganizational relations through managerial actions. Managers will act or refrain from action depending on their perception of the situation. Managerial perceptions of dependence may be of crucial importance for the governance of interfirm relations. A supplier may according to objective measures be heavily dependent on a particular buyer, as long as the managers of the firm do not perceive this dependence (e.g., because it has grown very gradually, and not as the result of one or more conscious decisions), no behavioral implications are to be expected (Noorderhaven, 15, 16). A certain level of dependence may also be perceived, but psychologically discounted, e.g. either as a result of generally favorable experiences in the past with the same buyer or in anticipation of being able to manoeuvre into a more favorable position (perhaps through projected growth or planned diversification) (Bresnen, 16 15).

One can conceive of a continuum of degrees of collaboration between the buyer and the supplier. At one extreme would be those cases where major buyer firms have not changed their relation with the suppliers or else have merely used vendor assessment schemes to make rational decisions about their supplier data-base. The criteria upon which such decisions are made may have been broadened to include quality, delivery and general attitude and capabilities alongside unit cost, however there need not be any effective collaboration between the supplier and the buyer. At the other extreme would be the case of vertical quasi-integration involving considerable mutual dependence between the buyer and the supplier and involving perhaps exchanges of technical information and advice, of personnel and the leasing or financing of new equipment and investment and training of staff.

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