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The Buyer's Perspective Of Cooperative Buyer Supplier Relationships In Industrial Markets: A Model Comparison Approach

Author(s):

Dr. Gregory B. Turner
Dr. Gregory B. Turner, Assistant Professor, Coastal Carolina University, Conway, SC 29526.

82nd Annual International Conference Proceedings - 1997 

Recent evidence shows that competitive strategies of confrontation are being replaced by more cooperative dealings between buyers and suppliers. These cooperative relationships are intended by buyers to improve the efficiency and effectiveness of their operations. While these results are often achieved, such relationships require a commitment of financial and human resources, and so consequences can be serious when the relationships fail.

Resource Dependence Theory. According to resource dependence theory, the environment is viewed as the source of scarce and valued resources essential to the survival of the organization. Organizations are unable to generate internally all the resources or functions required to maintain themselves. Therefore, organizations must enter into transactions and relations with elements in the environment that can supply the required resources and services.

SUBSTITUTABILITY - In the dependence theory model, one indicator of a firm's level of dependence on another firm for resources is whether there are other suppliers available to the firm.

HYPOTHESIS 1: The buyer's level of perceived substitutability for a supplier's inputs in a trading dyad will have a negative effect on the buyer's level of perceived cooperation in the trading dyad.

GOAL COMPATIBILITY - The struggle for autonomy, coupled with the need to form interdependencies to acquire needed resources may result in conflict.

HYPOTHESIS 2: The buyer's level of perceived goal compatibility in a trading dyad will have a positive effect on the buyer's level of perceived cooperation in the trading dyad.

ESSENTIALITY - Essentiality refers to whether or not the firm can do without those resources.

HYPOTHESIS 3: The buyer's level of perceived essentiality of a supplier's inputs in a trading dyad will have a positive effect on the buyer's level of perceived cooperation in the trading dyad.

FORMALIZATION - Formalization refers to the extent to which the requirements and characteristics of situations are made explicit.

HYPOTHESIS 4: The buyer's level of perceived formalization in a trading dyad will have a positive effect on the buyer's level of perceived cooperation in the trading dyad.

Transaction Cost Analysis. Transaction cost analysis seeks to explain why a firm adopts one economic structure over another to govern its acquisition of important resources. These structures can range from price-mediated spot market transactions to managerially coordinated resource allocation in vertically integrated firms.

ENVIRONMENTAL UNCERTAINTY (Diversity) - Environmental uncertainty hampers the ability of transacting firms to write contracts which cover various contingencies. Hierarchical or cooperative governance structures allow for the absorption of external uncertainty through specialization of decision making and savings in communication expenses.

HYPOTHESIS 5: The buyer's level of perceived environmental diversity in a trading dyad will have a negative effect on the buyer's level of perceived cooperation in the trading dyad.

ENVIRONMENTAL UNCERTAINTY (Volatility) - The second dimension of environmental uncertainty is volatility. Volatility refers to the extent to which the environment changes rapidly and allows a firm to be caught by surprise. To minimize these transaction costs, control is recommended through hierarchical or cooperative governance structures.

HYPOTHESIS 6: The buyer's level of perceived environmental volatility in a trading dyad will have a positive effect on the buyer's level of perceived cooperation in the trading dyad.

TRANSACTION-SPECIFIC INVESTMENTS - Transaction specific assets are important because they eliminate competitive pressure, the major thesis of the market superiority argument. To decrease the threat of opportunism, and to reduce transaction costs associated with monitoring, control is recommended through hierarchical or cooperative governance structures.

HYPOTHESIS 7: The buyer's perceived level of asset specificity in a trading dyad will have a positive effect on the buyer's level of perceived cooperation in the trading dyad.

Agency Theory. In its simplest form, an agency relationship is present whenever one party (the principal) depends on another party (the agent) to undertake some action on the principal's behalf. Agency theory uses the metaphor of a contract to describe the principal-agent relationship. Given the differing characteristics of the parties involved and environmental uncertainty, agency theory focuses on determining the most efficient contract to govern the relationship.

ASSET SPECIFICITY - The concept of transaction-specific investments also applies to discussions of agency theory. The supplier (buyer) may invest in transaction specific assets as a signal to the buyer (supplier) that the supplier (buyer) possesses the needed characteristics and of the supplier's (buyer's) commitment to the relationship. The hypothesis based upon asset specificity is the same as the one stated above.

SCREENING - The principal is aware of the tasks that must be performed and the agent characteristics required to perform these tasks. The problem here is that the principal cannot readily assess if an agent possesses the needed characteristics.

HYPOTHESIS 9: The buyer's level of perceived supplier screening activities in a trading dyad will have a positive effect on the buyer's level of perceived cooperation in the trading dyad.

HISTORY - One outcome of discrete type market transactions is a history of the actions of each participant, the rewards (or lack of) of the transaction, and the costs. Over time, as the two firms are involved in numerous discrete transactions, the two parties will learn about their respective capabilities. Therefore, over time, the information asymmetries between the two parties will decrease.

HYPOTHESIS 10: The buyer's level of perceived prior history in a trading dyad will have a positive effect on the buyer's level of perceived cooperation in the trading dyad.

HYPOTHESES TESTS. The first hypothesis was supported at the 0.05 level of significance. The second hypothesis was supported at the 0.01 level of significance. The third hypothesis was supported at the 0.01 level of significance. The t-value for the fourth hypothesis was in the correct direction but insignificant. The t-value for the fifth hypothesis was in the correct direction but insignificant. The t-value for the sixth hypothesis was significant at the 0.01 level but in the incorrect direction. The t-value for the seventh hypothesis was significant at the 0.01 level but in the incorrect direction. The t-value for the eighth hypothesis was significant at the 0.01 level but in the incorrect direction. The ninth hypothesis was supported at the 0.01 level of significance. The tenth hypothesis was supported at the 0.05 level of significance.

Managerial Implications. Many of the managerial implications of this study are meaningful to suppliers, not buyers. After all, it is a study of buyers and adds to the understanding of the buyer. This is clearly of value to suppliers. First, the failure of support for the hypothesis on transaction specific investments suggests that suppliers need to be suspicious of making these investments because their positive effect is questionable, based on this research.

Second, the formality of the relationship may have little to do with the perceived cooperativeness of the relationship on the part of the buyers. Getting a formal structure for the relationship in place is not nearly as important as some factors derived from other hypotheses in the study. For example, it would be extremely important for a supplier to communicate compatible goals; to identify ways in which the supplier's products are essential; and to differentiate the product so that substitutes are perceived as unavailable. When coupled with the significance of the goal compatibility and history constructs another possible explanation for the lack of support for formality can be offered. Compatible goals and a prior history of transactions may breed trust, which may be an important supplement to or even a substitute for formal legal contracts.

The results based on agency theory and dependence theory appear to be compatible in the context of managerial implications. As buyers subject suppliers to a screening process, they are cutting down on the number of alternatives available to them. Thus, they make the chosen supplier appear to be more essential, reduce the level of perceived substitutability, and increase the probability that the supplier will have compatible goals. In fact, goal compatibility should probably be included as a part of the screening process.

The following generalizations can be made based upon these results. First, perceived resource dependence is a determinant of perceived cooperation in these relationships. The perceived lack of exchange partners and the perceived essentiality of a supplier's inputs increased the buyer's level of perceived cooperation in these relationships. Second, compatible goals are also an important factor determining the buyer's level of perceived cooperation. Third, efficiency criteria, i.e., cost considerations, are apparently not an important determinant of the buyer's level of perceived cooperation in these relationships. Fourth, reductions in information asymmetries are a determinant of perceived cooperation in these relationships. Screening activities and a prior history of transactions increased the buyer's level of perceived cooperation in these relationships.


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