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Managing attraction in customer-supplier partnerships Managing attraction in customer -supplier partnerships Carlos Cordon, Thomas E. Vollmann and Kim Sundtoft Hald IMD 2005-29 Carlos Cordon Professor IMD - International Institute for Management Development 23, ch. de Bellerive, P.O. Box 915, CH-1001 Lausanne, Switzerland Tel: +41 21 618 0390 Fax: +41 21 618 0111 E-mail: [email protected] Thomas E. Vollmann Professor IMD - International Institute for Management Development 23, ch. de Bellerive, P.O. Box 915, CH-1001 Lausanne, Switzerland Tel: +41 21 618 0333 Fax: +41 21 608 0111 E-mail: [email protected] Kim Sundtoft Hald Doctorial candidate Copenhagen Business School Department of Operations Management Solbjerg Plads 3 2000 Frederiksberg Denmark Telephone: +4523722303 E-mail: [email protected] Copyright © Carlos Cordon, Thomas E. Vollmann and Kim Sundtoft Hald December 2005, All Rights Reserved 1 Managing attraction in customer-supplier partnerships Managing attraction in customer-supplier partnerships Cordon, C.; Vollmann, T.E. and Hald, K.S. Abstract A company’s performance is increasingly influenced by the effectiveness of its supply chain, particularly by working with the best suppliers. Similarly, working effectively with the best customers ensures that the overall value chain will be very competitive. A wellmanaged company, is aware of the need to develop close coordination with key suppliers and key customers with the objective of jointly increasing value and decreasing cost in the overall supply chain. Information gathering and model building are the classic tactics normally used to achieve this result. In this article, we present a third tactic, development of attraction in dyadic relationships. With some theoretical underpinnings in social exchange as well as the literature focusing on long-term orientation in customer-supplier partnerships and customer-supplier partnership value, we have developed a conceptual model highlighting three major components of attraction: the perception of expected value gained from the dyadic relationship, the influence of comfort on the effectiveness of the relationship, and the role of relative dependence perception between the dyad partners. We then show how these components interact, and finally discuss how one might better manage the interaction. Key words Customer-supplier Relationships; Relationship Management; Relationship-value; Comfort; Dependence; Attraction. 1. Introduction It is recognized that suppliers have a fundamental role in a company’s competitiveness (Porter, 1986) and the way to manage relations with suppliers has been a major focus of operations research and practitioners in the last 15 years. Academics and managers have argued that an advantage can be obtained by creating the winning combination that leverages resources/competencies in conjunction with selected supply chain partners. This implies that managing supply chain partners is essential to creating such a winning 2 Managing attraction in customer-supplier partnerships combination. How these dyads (customer-supplier relationships) might create such an advantage and the dilemmas faced by both, the customer and the supplier is the focus of this paper. As we will see below, most of the research has focused on one view: the supplier view (in the case of marketing research) or the customer view (in the case of operations research); i.e. the latter on the practices of customers in managing and developing suppliers. By contrast our research takes the point of view of both the customer and the supplier; in particular, we want to explore the conditions under which suppliers and customers will jointly develop the resources (i.e. innovation, engineering) to create a winning marketplace combination. On the practitioner side, the traditional focus has been on selecting/managing suppliers. However, the recent development of supplier councils might be considered as a step in viewing relations from the supplier’s viewpoint. Interestingly enough some observers have suggested that a “supplier rebellion” is in the making, based on recent incidents of vendors not supplying – thereby forcing manufacturers to stop their plants (Cordon, 2005). Numerous articles have been written on how to enhance inter-organizational management. Some focus on the management of “organizational environments” in general (Pfeffer and Salancik, 1978), others concentrate on the management of the immediate partners of a company using the term “managing the dyad” or the “dyadic relationship” (Dyer and Singh, 1998; Håkansson and Snehota, 1995), while others are concerned with the management of networks (Dyer and Nobeoka, 2000; Granovetter, 1973; Powell, 1990), or supply chains (Lambert and Cooper, 2000; Mills et al., 2004). In this article, we concentrate on the management of customer-supplier or supply chain dyads. Several approaches have been proposed by academics and implemented by practitioners to understand and enhance the performance of supply chain dyads. Whether these are marketing (i.e. management of customers) or purchasing/sourcing (i.e. management of 3 Managing attraction in customer-supplier partnerships suppliers), there are generally two main approaches: information gathering and model building. Both approaches intend to maximize control over partner behaviors, using information and model building to support inter-organizational coordination and feedback. Information gathering is concerned with “detection at a distance,” making visible those invisible actions that affect dyad performance. Tools applied to implement this approach include access to supply chain partner Enterprise Resource Planning Systems (Jacobs and Bendoly, 2003); Inter-organizational systems (Christiansen, Rohde and Hald, 2003) and inter-organizational performance measurement systems (i.e. supplier-customer evaluation or supply chain evaluation) (Beamon, 1999; Lambert and Pohlen, 2001; Simpson et al., 2002). Model building on the other hand is concerned with “representation,” reducing complex actions to a less complex and more manageable form. Tools applied to implementing this approach include marketing and purchasing strategies and more specifically customer and supply segmentation using portfolio models (Fiocca, 1982; Olsen and Ellram, 1997). Essentially, the supply chain management and purchasing literature has been very productive on how to manage relations, but always from the customer perspective. It is not within the scope of this paper to provide a complete literature review. However, we should mention the seminal work of Dyer (1996) and Dyer and Nobeoka (2000) about practices in the auto industry, Bensaou and Venkatraman (1995) on information processing needs and capabilities, Lariviere and Porteus (2001) on incentives in the supply chain boundaries and Novak and Eppinger (2001) on product design and supply chain management. In this article, we focus on a third and less discussed approach to understand and enhance performance in supplier-customer dyads: Increasing mutual attraction, both from the supplier and the customer perspective. A recent paper (Chen et. al, 2004) argues that the supplier viewpoint has been a missing part of the research agenda. Including it is different in that it rejects the underlying principle of “maximizing inter-organizational control.” Instead, it focuses on “understanding the partner’s interest and adapting to 4 Managing attraction in customer-supplier partnerships work cooperatively in specific supply chain dyads.” The logic is that by becoming a more attractive customer and a more attractive supplier, the company’s key dyad partners will willingly engage in dyad-based resource/competency development. When done right, the result should provide the company with access to a willing, committed and more malleable platform of important external resources. But how can an industrial company become a more attractive partner? And what could a customer expect from becoming a more attractive partner? To explore this question, we look at establishing clear knowledge of the payoffs from dyad partner attraction, the mechanisms that influence attraction, and the managerial actions needed (learning and unlearning) to develop partner attraction. We see development of partner attraction as entailing three primary components: Partner expected value perceptions, partner comfort perceptions and partner dependence perceptions. Note that all of these are perceptions: they will have different values for different actors in each company. For example, various people in a customer company will have different perceptions of the three components as applied to a particular supplier – based on their unique experiences. A key question concerns the variations in these perceptions within a company (what we call “alignment”). An even more important question is how one can improve their attraction: How might the customer improve a key supplier’s perceptions of the customer’s attraction? Which of the three attraction components is most important? We explore how these components can be managed or influenced through a combination of structural – and behavioral adjustments. The article is arranged as a progressive development of the conceptual model in three main steps. In section two, we further develop the construct of attraction. Here, we provide some background on the definition of attraction, its basic dimensions, mechanisms involved in its construction and application to supply chain management dyads. In sections three, four and five, we explore each of the three perception components of attraction: expected value, comfort and dependence. In section six, we examine how the three perceptual components interact and how important this interaction can be for the effectiveness of the dyad. This leads to a further discussion: How can one 5 Managing attraction in customer-supplier partnerships best manage the interactions and thereby develop/foster dyad best practices? Finally, in section seven, we formulate some conclusions and indicate directions for future research. 2. The components of attraction The concept of attraction is a construct that has meaning between two actors. Whether these actors are individuals (i.e. colleagues, purchaser-sales representatives, lovers, husbands and wives etc.) or groups of individuals (i.e. organizations, industrial companies, supply chain dyads, etc.), the basic mechanisms are similar. The mechanisms that govern associations between actors have their roots in primitive psychological feelings of attraction between individuals and their desires for reward (Blau, 1964). Attraction is the force that helps attach actors to actors on two accounts. First attraction is a mechanism to establish association based on some desired payoff (perceived expected value). In this phase of a relationship, attraction acts as a creator, or as a force to attach two previously unattached actors. Second, attraction acts to continue and enhance the relationships between actors (to increase the perceived expected value). Here attraction helps to maintain the relationship and commitment to it, and expand the association between the actors. Blau (1964) first defines attraction as a one-sided expectation of reward following from association. “Actor A is attracted to actor B, if A expects that association with B to be in some way rewarding for A” Thus, perceived expected value is what draws A to B and is the core of the construct. But association has to be two sided: successful attraction requires both parties to perceive improvements in expected value. Thus, attraction is the force to drive actors together. The question is how is this accomplished? From Blau (1964) we find that attraction leads to attraction in the following way. “When actor A is attracted to actor B, A wants to prove attractive to actor B.” 6 Managing attraction in customer-supplier partnerships Thus A needs to be perceived as attractive to B. If A is a customer and B is a supplier with key competencies, A needs to help B see the payoffs from the association: the expected value to B needs to be perceived as positive. One way of establishing perceived expected value is through impression management (Goffman, 1959). By this, we mean a conscious and active construction of an image of the association being valuable to the partner in a dyadic relationship. Continuing and enhancing the association requires that the expected value perceptions be enhanced through achievements of concrete payoffs. As noted above, there are three primary components of partner attraction: Actual payoffs (expected value perceptions) might be the most important component of attraction, but perceptions of comfort and dependence can play major modifying roles. Let us consider two examples. First, consider a customer in a relationship with a supplier where there are almost no supplier alternatives, or where switching costs are prohibitive. This customer will see itself as having high dependence upon that supplier. This perceived dependence might cause the customer either to increase its attraction in the relationship – or to exit the relationship. If the first choice is made, attraction might be increased through joint work that leads to enhanced value or comfort – to a greater sense of shared values. Second, consider a different customer-supplier dyad where there are shared values, a strong sense of mutual destiny, where operational and social interactions are functioning with mutual understanding and where dyad measures of performance are continually improving. Both dyad partners will be comfortable, and there should be good opportunities to enhance the association (win-win). In this case, the perceived comfort can dominate issues of perceived dependence. The customer (and the supplier) will feel a sense of security, that expected value perceptions will continue, and that the dyad will adapt to situations of need. All of these components of comfort can work together so that each dyad partner perceives the other as worthy of investments. 7 Managing attraction in customer-supplier partnerships However, many supply chain dyads include adversarial relationships, which influence all three primary perception components (expected value, comfort, dependence). In the extreme case of major American auto manufacturers, the relationships with suppliers have become largely poisoned (Liker and Choi, 2004). For the suppliers, there is little comfort perceived, a strong sense of dependence and perceptions of lowering expected value as the customers make unilateral demands for price reductions – coming at the expense of supplier margins. We summarize our thinking about the three components of attraction in the following equation: Partner’s Attraction = F [P[Expected value]; P[Comfort]; P[Dependence] ] Where: F[y] is the supply chain partner’s attraction function towards the dyad partner in question. P[x] is the supply chain partner’s perception function towards the outcome of x. Thus, any company (i.e. supplier or customer) can increase the attraction of a supply chain dyad either directly by increasing the payoffs (expected value dimension) or indirectly by affecting the criteria that determine perceived comfort and perceived dependence. But the attraction of one dyad partner also needs to be seen through the eyes of the other – and the relationships might involve many different actors. These different actors might have very different perceptions of the attraction of the other party in the dyad. This is what we have called, alignment. 3. Dimensions of partner perceived expected value The expected value of a dyadic relationship has been defined in different ways by previous research. First, expected value can be defined tightly as output/input, but this does not count for the highly individual perceptions that underlie what one firm thinks it gains from working 8 Managing attraction in customer-supplier partnerships with another. A better definition is the perceived trade-off or ratio between multiple benefits and sacrifices that is gained through a partner relationship (Monroe, 1991). Stated differently it is a comparison between “what you get” or expect to get and “what you give” or expect to give (Zeithaml, 1988). Second, an additional distinction can be made between expected value creation for each dyad partner, for the dyad jointly, and the expected value made possible due to connections with further links in the supply chain. The conceptualization of expected value and the distinction between inside/outside the dyadic relationship have been referred to as the first order/second order function (Håkansson and Johanson, 1993), the primary-/secondary function (Anderson et al., 1994), direct/indirect function (Walter et al., 2001; Walter et al., 2003) or as efficiency/effectiveness/network functions (Möller and Törrönen, 2003) of a relationship. We take a comprehensive approach to dyad value determination. First, as noted, our focus is always based on perceptions – which are individual as well as organizational (even if the organization does not formally define value). Second, we see expected value as being perceived through different lenses: There are customer perceptions – based on what the customer sees as important; there are supplier perceptions – based on a differing set of criteria; and there are joint – or dyad perceptions of value, but only in enlightened dyads, where joint value creation is understood (Zajac and Olsen, 1993). Third, we see attraction as being determined by these perceptions of value, but modified by perceptions of comfort and dependence. In Table 1, we highlight the components of each of these constructs. <<Insert Table 1 here>> Let us now turn to a more detailed analysis of expected value components. Cost reduction is concerned with bringing value to the customer by reducing the total cost and enabling the customer to compete on selling price. Ideally, cost reduction is best achieved by taking cost out of the supply chain, not by improving the customer prices at the expense of supplier margins (which has a deleterious impact on comfort). Walter et 9 Managing attraction in customer-supplier partnerships al. (2003) describes what they call “the cost reduction function” from a customer perspective. This activity focuses on the supplier’s ability to provide the customer cost reduction potential. The ability is largely achieved by the supplier reducing the amount of money spent on its goods and services through various activities (e.g. concentrating volumes, standardizing inputs, reengineering products, etc.) In fact, the best source of cost reduction is to focus on those costs that can be reduced by a joint focus on dyad costs: For example, inventories kept by both supplier and customer – where one single inventory can suffice. Often, in today’s supply chain environment, squeezing suppliers for cost reductions is the rule – how the suppliers live with this demand is their problem. In a qualitative study based on interviews, Ulaga (2003) identified annual price decreases as the most important aspect in buyer-supplier relationships. In the same study the supplier’s ability to help the customer take out supply chain cost is also considered a valuable (but not as critical) asset. Rarely do we find literature where it is the customer – who helps the supplier take out supply chain cost! Time compression is about bringing value to the customer through higher market responsiveness, both in product development and in supply chain execution (MasonJones and Towill, 1999). Time-to-market, response to unexpected end customer demands and reducing inventory investments all require time compression and coordinated dyad planning. Ulaga (2003) discusses the supplier’s ability to help customers reduce time-tomarket and identifies three phases in product development where this can be achieved: In the design phase; in the prototype development phase and in product testing/validation phase (Ulaga, 2003). We supplement this thinking on time compression value by arguing that time compression in the supply chain can be equally important to that of product development. Time compression in the supply chain directly results in supply chain inventory reductions – and potentially to reductions in the Forrester/bullwhip effect (Forrester, 1961). Innovation is creating value for the customer by improving their product portfolios. This is achieved both by improving existing components and products and by developing new 10 Managing attraction in customer-supplier partnerships ones. A supplier’s proactive ability to develop new (or improve existing) products, is seen as valuable by their customers (Ulaga, 2003, Walter et al., 2001). Also innovation can be valuable for the suppliers by improving their technological competencies as well as their ability to transfer knowledge (Walter et al., 2003). Finally, although innovation is often perceived as a key source of customer expected value, it is often not uniformly seen as such throughout the customer organization. It is quite common that engineers will have different perceptions than those more directly related to product costs or to factory operations. Thus, there can be a lack of alignment in a company as to the perceived value of innovation. Access to new partners is bringing value to the customer by improving the offerings in its supply chain. This allows the customer to increase its customer base – and perhaps to work with new suppliers as well. A similar argument can be made for the supplier: an effective supply chain dyad should provide the supplier with improved competencies that can be leveraged with new customers (and perhaps with existing/new suppliers). Walter et al. (2001) and Walter et al. (2003) describe what they call “the market function.” “The market function” is concerned with the supply chain partner’s ability to connect the dyad to new potential business partners. These partners can be other relevant suppliers or potential customers. For example, one of the dyad partners has a prestigious brand name that can help attract new customers or suppliers. Further by sharing experience in dealing in new market areas (such as regulated markets), a supply partner can help open doors for its dyad partner (Walter et al., 2001). This concludes the discussion of customer expected value dimensions. Let us now turn to expected value for the suppliers. Volume is probably the primary source of increased value for suppliers, since in many cases the customers can rationalize their product line, and reduce their supply base, thereby concentrating their volumes on a smaller number of suppliers. This in turn can have an immediate impact on cost reduction: The customer has fewer suppliers to manage, transaction costs are reduced and the supplier can often afford to offer a volumebased cost reduction. We find that many well-run companies are able to rationalize their product line – reducing the number of items they purchase by about three quarters. They 11 Managing attraction in customer-supplier partnerships are also able to reduce the number of suppliers by an equal amount. This results in a potential 16-fold increase in volume per supplier. Growth is the secondary source of perceived value for suppliers. A supplier is generally happier with a customer that is growing than with the opposite case for two main reasons: the first is the obvious expected growth in supplier sales, while the second has to do with amplification. Growth is important to suppliers; if the customer sees little or no growth in the items currently being procured from a supplier, this might lead to a decrease in perceived customer attraction by the supplier. Learning is the last of the three dimensions of supplier expected value. Learning applies equally to the customer (Dyer and Hatch, 2004). Essentially, a customer is very attractive if the supplier, in working with this customer, develops new competencies that can be leveraged in other dyad relationships. This value is not only for the suppliers. A customer might compare the competencies of its best suppliers, learning and leveraging this learning with other suppliers. The greater the partner investments in the inter-firm knowledge sharing routines and the greater the partner specific knowledge absorptive capacity, the greater the potential for relational rents (Dyer and Singh, 1998). Competency development is best seen as a dyad based source of expected value. This is because there is competency development in the dyad itself (Møller et al., 2004): The whole can and should be more than the sum of its parts. The example of Procter & Gamble working with Wal-Mart is a good illustration. Both firms have gained new competencies by working together and these competencies are not easy for competitors to copy. Joint competencies are very difficult to imitate. In fact, these joint competencies are so difficult to duplicate that it took many years for Wal-Mart to be able to replicate them with other suppliers. Joint competency development resides in the dyad – developed jointly. 4. Dimensions of partner perceived comfort We argue that comfort in a dyadic relationship has a moderating influence on the expected value perceptions of the dyad partners. When the comfort level is high, the 12 Managing attraction in customer-supplier partnerships resultant attraction of the dyad is greater. The reverse is also true. If a dyad partner is not comfortable, the attraction goes down. The construct of comfort resembles the construct of trust, but we argue that it better describes the different dimensions entailed in dyadic relationships and more precisely that it is a much more flexible and broad construct able to explain individual behavior at different organizational levels and functions in the two dyadic organizations. Trust on the other hand has been widely discussed in the literature, but it most often only includes one dimension. For instance trust has been defined as “a willingness to rely on an exchange partner in whom one has confidence” (Moorman et al., 1993), as “a generalized expectancy held by an individual that the word of another can be relied on” (Rotter, 1967) and as “a firm’s belief that another company will perform actions that will result in positive outcomes for the firm as well as not take unexpected actions that result in negative outcomes” (Anderson and Narus, 1990). Comfort is a perception and it is often different among different actors in both dyad companies. Comfort is highly subjective, influenced by day-to-day interactions. This means that comfort is subject to rapid change – and negative changes happen much faster than positive changes. Comfort is influenced by day-to-day interactions between the dyad partners. For example, we often see customers delaying supplier payments near the end of accounting periods to improve their cash position – even when this runs counter to contractual agreements. Comfort can be enhanced by each partner asking the other: What do I do that causes you problems? How might we jointly eliminate them? A more basic problem with comfort comes from changing key players in the relationship. For example, firms centralizing key parts of their purchasing activities (e.g., price negotiations, terms, conditions) bring new actors into the dyadic relationship, and usually the result is to decrease the comfort levels especially in the supplier organization. Some managers will argue that this might not be a bad result, if “comfort” has become “complacency” That is, in some cases comfort can be high even though the expected value for one or both firms is decreasing. In this case the relationship can enter a 13 Managing attraction in customer-supplier partnerships dangerous state of coziness, with competitiveness (expected value) slowly deteriorating. However, we posit that if the expected value level becomes too low this could encourage the partner to exit the relationship even though the comfort is high. On the other hand, if the partner is communicating and supporting the dyadic relationship to run smoothly on both the strategic and operational levels, there will be a positive influence on the partner’s comfort and intrinsic attraction. Positive feelings and a sense of “they understand us” and “we understand them” are generated, and this will strengthen partner attraction. We now describe the key components of strategic comfort. Strategic comfort is concerned with continuation/expansion of the dyadic relationship. Promoting strategic comfort means ensuring the partner that the business and benefits the partner gets through the dyadic relationship will continue/grow, that the continuation/growth will come from joint working and that the partner will get a fair share of the benefits gained. Strategic comfort is subdivided into five main components: Credibility; fairness; loyalty, realism, and shared values. Credibility is strengthening the partner’s perception that commitments are reliable. Thus if a partner is presumed to be credible, the other party adopts a belief that this partner “keeps a promise” and does not “let us down.” Credibility is linked to the long-term orientation of the partners (Ganesan, 1994). Credibility is also tied to consistency across the various levels/functions in the dyad companies. For example, if the supplier is promised some level of volume that does not materialize, the credibility of the dyad suffers. Similarly, if negotiated payment terms are not adhered to, the same result occurs. Fairness is strengthening one partner’s perception that the other acts in honorable and fair ways. Fairness is first concerned with how the benefits attained through a dyadic relationship are divided. When a partner feels its needs are met long term through actions undertaken by the dyad, the partner perceives fairness in the relationship with its dyad partner. With this perception of fairness, short-term inequities will be tolerated to yield 14 Managing attraction in customer-supplier partnerships long-term benefits. Fairness is also about the approach developed to deal with the day-today issues of a dyad. Are problems seen as joint problems – or pushed onto one partner? Will each partner act in the best interest of the other – even if at his or her own short-term expense (Dwyer, Schurr and Oh, 1987)? Companies perceiving their partners to possess a reputation for fairness (i.e. partners not terminating relationships and seeking gain at their partner’s expense) are more likely to adopt a long-term orientation in the relationship (Ganesan, 1994). Loyalty is the partner’s perception that the other partner company will be there in times of crisis. Walter et al. (2001) constructs the safeguard function and states that customers who are loyal to the suppliers in times of market pressure are more attractive to the supplier. In a recent example we saw a large electronics firm order materials from a supplier that would not be needed for at least six months – in order for the supplier to solve its current fiscal problems. The supplier is very “loyal” and will be supportive of this electronics customer in almost any joint endeavor. On the other hand, we witnessed a mobile phone company that magnified its own downturn in sales dramatically for several of its key suppliers – in some cases resulting in no orders for many months. The suffering was not forgotten. Realism is acting in a realistic manner towards the partner. Realism implies for example not making unilateral demands that are virtually impossible to satisfy. It requires investing time into knowing the partner’s inherent capabilities – and helping to manage within these capabilities. If they are not sufficient, then the realistic dyad partner tries to find joint ways to break constraints – or to seek joint alternative solutions. Companies that set impossible high standards for their partners destabilize the relationships in which they participate and can ultimately make them dissolve (Anderson and Weitz, 1989) Shared Values refers to understanding of the other partner’s strategy and having compatible ways of working. For example, if one partner’s strategy is to consolidate, reduce risks and reduce costs while the other is looking for growth and new opportunities there will be conflicts when discussing increasing investments. 15 Managing attraction in customer-supplier partnerships This concludes the five main components of strategic comfort. We now turn to the dimensions of operational comfort. Operational comfort is about how dyad partners can best support day-to-day operations. From a managerial point of view, operational comfort implies a joint concern with all logistical issues in both companies – on a shared basis, rather than treating the relationship on a purely arms-length basis. It is a shared recognition that the dyad will work together to meet end customer demands. It often implies a commitment to performance, to meet on time delivery demands and to help your partner solve logistics problems, particularly in times of crisis. Operational comfort is subdivided into three main components: reliability, support and rescue. Reliability is about fulfilling the promises made to the other partner. In managerial terms, this is expressed as “flawless execution” (Vollmann et al., 2005). It means for example making a production schedule that satisfies the demands of the end customers, coordinating the schedules across the dyad to achieve synergies, and then executing the schedule: that is, produce and deliver what is scheduled, on time, in full, no errors (OTIFNE). The result is that each dyad partner can depend upon the other1. Supplier delivery performance is mentioned as an important aspect of a supplier’s value creation potential to a customer (Ulaga, 2003). Support is about being there when needed, and by a combined approach to operational issues. Implied is a strong sense of joint operational problem solving, particularly in terms of designing cooperative solutions to new problems facing the dyad. For example, if a new design is anticipated, involving the supplier in the product design stage can allow the supplier portion of the new design to better adapt to the particular operational constraints at the supplier. A supplier’s ability to provide speedy, exact and detailed information, and fast decision making is a valuable asset to a customer because it might be required by their customers for information/decisions (i.e. for product change requests) (Ulaga, 2003). There is a strong social dimension to developing support, as 1 In this way, this component resembles the strategic component of credibility, but it is different in that it focuses on commitments made in operational day-to-day business. 16 Managing attraction in customer-supplier partnerships defined by Walter et al. (2003): Support is defined as the supplier’s ability to work cooperatively and supportively with the customer, which in turn will provide the basis for an attractive dyadic relationship. Rescue is supporting their customers in crises for the customer sourcing operation (Walter et al., 2003). Delivery flexibility highlights the supplier’s ability and willingness to change previously agreed delivery schedules, and this will make them more attractive in the eyes of the customer (Ulaga, 2003). However, being able to respond to crises has hidden costs. Usually, the customer who has the highest occurrence of crises is the most expensive to serve – and will probably need to pay higher prices. 5. Dimensions of partner perceived dependence As discussed earlier, dependence can play a strong role in making a dyad function more or less effectively. That is, we argue that dependence has a moderating effect on perceived expected value and that this effect either can weaken or strengthen the partner’s overall perceptions of attraction. We see four key dimensions of dependence: Relative sizes of the dyad firms, the proportion of business done together, “lock-on,” and alternatives. Relative size refers to the size of the two firms in the dyad – and as a result their relative power positions. It is generally said that dyad partnerships work best with firms of roughly the same size. However, sometimes a smaller firm can have some unique competency or products that would be especially useful in combination with those of a larger firm. The key issue here is the extent to which one firm has an advantage over the other and can use their relative power to create some dependence over the other firm in the dyad. Proportion of business done together is a measure of how critical it is to continue working with this particular dyad partner. A related metric for a supplier is the ranking of this customer in terms of sales – and for the customer, the ranking of spend on this supplier. This is a question of relativity/balance. If the two firms are relatively the same 17 Managing attraction in customer-supplier partnerships in terms of importance to each other, there is less chance that one will attempt to exert dependence over the other. On the other hand, if one firm represents a large proportion of business to another – but the reverse is not at all the case, then there can be a perception of major dependence (which might not in fact be the case – but perceptions are what counts). “Lock-on” is an idea that expresses the extent to which a customer – or supplier is committed to the dyad partner – and the extent to which changing involves high switching costs. When one dyad partner has significant lock-on to the other, this can represent a strong degree of dependence. Traditionally, lock-on was seen as something to avoid; classical purchasing ideas were focused on materials being purchased from multiple suppliers – and to make these suppliers compete for the business. Today, many firms are having single suppliers who provide an ever more customized bundle of goods and services – that uniquely fit the needs of the customer’s customers. Alternatives A final issue in dependence is the existence of alternatives. There is a great difference in single sourcing when the customer chooses one of several firms to work with on an exclusive basis – versus when there is only one vendor that can supply the products or services needed. In such a case, the customer will feel quite dependent. The traditional example of lack of alternatives is in operating systems for personal computers. Most customers dislike having only one supplier – they feel too dependent. Most current literature on long-term-orientation in dyadic relationships and dyadic relationship value assumes that a balance in partner dependence or interdependence must exist as a prerequisite for partners to feel attraction and thus for the partnership to survive. Kanter (1994) for instance suggests as one of eight criteria for success, that relationships should be created on a platform of interdependence, where neither can accomplish alone what both can accomplish together. In establishing the casual link between balance in dependence and the length of the relationship, this stream of literature often uses the power dependence theory of Emerson (1962). It is presumed that when dependence and thus a power imbalance exists the less 18 Managing attraction in customer-supplier partnerships dependent actor will exploit the more dependent actor, and the more dependent actor (or company) will be dissatisfied with the relationship. It is argued that imbalanced dyadic relationships are characterized by less cooperation and a grater frequency of conflict (Dwyer, Schurr and Oh, 1987). However, we argue that the basic assumption, that a partner always will exploit a power imbalance, is not correct. First, it is not a question of whether the imbalance is used to appropriate an unfair share of the dyad expected value, but rather it is a question of whether the partners perceive it to be the case. Next, we argue that the consequence of an imbalance in a relationship should be seen in combination with partner perceived comfort and expected value. If a partner perceives that strong expected value can be reaped from the dyadic relationship, and at the same time feels both a strategic and operational comfort in working with its dyadic partner, then a major dependence imbalance will not affect its tendency to exploit the relationship. In the next section, we turn to how to manage dimensions of the three perception issues in dyad partner attraction: expected value, comfort and dependence. The goal is to propose mechanisms that dyad partners can use to influence the various dimensions and to provide some words of warning for how seemingly common business approaches might lead to serious reductions in the attraction of one’s firm to a supply chain dyad partner. 6. Managing partner attraction Following our model, management of attraction to dyad partners is achieved through the enhancement of the dyad partner’s perceptions of expected value, comfort and dependence in the dyadic relationship. We further argue that to manage partner attraction, all of the three constructs must be considered. This is the case, since some combinations of the three constructs will outperform the others and yield better results in archiving partner perceived attraction. We have summarized our propositions in Table 2 below. <<Insert Table 2 here>> 19 Managing attraction in customer-supplier partnerships This brings us to the question of how to influence the three constructs in the table. We argue that this question involves understanding the issues and perceptions of each dyad partner in terms of expected value, comfort and dependence. It is also critical to understand that perceptions on these issues will vary among different actors in the companies. It could be the case, for example, that there is a great deal of openness and trust between technical people in the dyad companies because they have had to come together to solve particular problems – and they just know each other. But, at the same time, the perceptions of the sales and purchasing people might be very different. A prerequisite for influencing partner perceived attraction, is establishing knowledge about how the mechanisms are formed. We propose four mechanisms to manage partner perceptions of expected value, dependence and comfort2: investment, adaptation, communication and institutionalization. Investment: Kanter (1994) claims that true partners should invest in the relationship, thereby creating transaction specific ties that bind the relationship together. These should increase both comfort and expected value. If a partner is perceived to engage in “transaction specific investments” in a dyadic relationship, these investments show strong commitment supporting a notion of partner credibility and in this way produce a longterm orientation in the partnering company (Ganesan, 1994). To the extent that these investments are mutual and joint, shared values, strategic comfort and dependence are influenced. In a theoretical paradigm supporting transaction cost economics, Williamson (1975), and Weiss and Kurland (1997) explore the influence of transaction specific investments/assets in cementing distribution channel relationships. Transaction cost theory, they argue, holds that relationships are maintained because the parties invest in relationship-specific capital. The argument goes that such investments are idiosyncratic to the specific dyadic relationship and thus non-redeployable in others. This increases the switching costs of potentially replacing an exchange partner (and creates joint dependency) because the assets are lost forever (Barney and Ouchi, 1986). More specifically Weiss and Kurland (1997) explore how transaction specific investments on 2 We do not claim that this is a complete list. Instead we discuss the four mechanisms as mere examples. 20 Managing attraction in customer-supplier partnerships the part of a manufacturing representative (a customer) influence the likelihood that the manufacturer (the supplier) will terminate the relationship. The results of the research indicate that when used and balanced properly transaction specific investments have a cementing effect in the supply chain as such. Finally, the second hypothesis indicates that the cementing effect can cross several tiers in the supply chain acting as a binding force cementing whole chains together. Adaptation: Adaptations can be product, process or business oriented. Making adaptations in one or more of these areas means that the partner making the adaptation changes its own ways of working to adapt to dyadic- or partner ways of working. This can improve supply chain cost performance, delivery performance and further produce a perception of both comfort and increased partner dependence. Wilson (1995) highlights product adaptations as one of five criteria for dyadic relationship survival. Day (1995); Wilson (1995); Dwyer and Tanner (1999); Morgan and Hunt (1994) all point to the establishment of mutual goals, that is business adaptation in governing mechanism, as a prerequisite for success in dyadic relationships. Communication: Intensive two-way communication between the two companies is defined as the frequent exchange of plans, programs, goals, expectations and performance evaluations. It is stated that such frequent exchanges of information is critical for coordinating actions, preventing misunderstandings, resolving disputes and make each party more confident in the relationship and thus more willing to make an effort to keep it alive. That is, intensive communication increases operational comfort. Here we would like to highlight the dyadic exchange of company goals and expectations as especially important in making the dyadic relationship successful and thus ensuring its survival (Anderson and Weitz, 1989). This enhances the key variables in expected value. Institutionalization: Finally, the last of the mechanisms that we will mention in this article is institutionalization. Institutionalization is contrary to the other three mechanisms mentioned above, since it is intra-company focused. Its aim is to affect internal perceptions of supply chain partners by creating an image of importance. Stated differently, it is about establishing a top management vision and a company culture where 21 Managing attraction in customer-supplier partnerships relationships with suppliers are valued (Kanter, 1994; Day, 1995; Mentzer, 2000). In essence, institutionalization has an internal focus to understand the inherent benefits of better supply chain management in general – and dyad relationship management in particular. We conclude this section with a framework for the management of partner attraction: <<Insert Figure 1 here>> 7. Conclusions and Future Research Directions In this article, we have shown how attraction is an important addition to information gathering and model building for managing inter-organizational relationships. We have proposed that partner attraction is built on the perceptions of many individuals in the dyad companies. 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(1993), Form transaction cost to transaction value analysis: Implications for the study of interorganizational strategies, Journal of Management Studies 30:1, January. 26 Managing attraction in customer-supplier partnerships 27 Managing attraction in customer-supplier partnerships Expected Value Comfort Customer Focus Supplier Focus Dyad Focus • • • • • • • • • Cost reduction Time compression Innovation Access to new partners Volume Growth Learning Access to new partners Competency development Strategic focus • • • • • Credibility Fairness Loyalty Realism Shared values Operational Focus Dependence • Reliability • Support • Rescue • Relative size/power • Proportion of business • Lock on • Alternatives Table 1: The components of expected value, comfort and dependence 28 Managing attraction in customer-supplier partnerships Nr Expected value Perceived dependence Perceived comfort 1 High High High Resultant perceived Attraction High 2 High High Low Low 3 High Low High High 4 High Low Low Medium 5 Low 6 Low 7 Low 8 Low . Consequent Action of partner High attraction, though concerns about dependence Will seek to reduce dependence and/or exit the relationship. High attraction. Will be annoyed about the partner behavior and find working together frustrating High High Medium Should feel a dangerous sense of coziness and convenience. Need to jointly develop the dyad expected value High Low Low Will seek to reduce dependability and leave the relationship. Probably not participate in joint improvement efforts. Low High Medium Could feel a dangerous sense of coziness and convenience. Low Low Low Will seek to reduce dependability and/or leave the relationship. Table 2: How perceptions of expected value; - dependence and comfort work in combination to produce perceived attraction. 29 Managing attraction in customer-supplier partnerships Perceived comfort Strategic Operational •Credibility •Reliability •Fairness •Support •Loyalty •Rescue •Realism •Shared values Expected value (Customer) •Cost reduction •Time compression •Innovation •Access to new partners Managing dyad partner attraction •Investment •Adaptation •Communication •Institutionalization Customers perceived attraction Expected value (Supplier) Perceived dependence •Volume •Growth •Learning •Access to new partners Suppliers perceived attraction •Relative size/power •Proportion of business •Lock on •Alternatives Figure 1: A framework for making partner attraction manageable 30