Business Relationships Risks and Opportunism

Buvik and John note thai In establishing a customer-supplier relationship, iliere is tension between safeguarding and adaptation. Vertical coordination cari Facilitate sLroilgcr euMtnner-selier lies tint at the same time may increase the risk tq the customer's and supplier's s|iccific Investments Specific investments are those expenditures tailored to a particular company and value chain partner [e.g., investments in com|iany-spectfic tramlng, equipment. mid operating procedures Of systems).'''' Specific investments help firms grow profits 4nd achieve their positioning^5 For example, Xerox (¡as worked closely with its suppliers 10 develop customised processes and component]? that reduced its copier-nianufarlnring costs by 30 to -SO percent hi jfeturn. suppliers received sales, and volume guarantees. an enhanced Lindens landing of their customer needs, and a strung position with Xeroy: foe Future stiles.'"'

Specific invest men is, however, also entail considerable riik to boih customer and supplier. Transaction theory from economics maintains tluii beeausc these investments are partially stink, they lock in the firms thai make the investment* to a particular relationship, Sensitive cost and process information may need 1« be eschanged. A buyer mav he vulnerable to holdup because of sirftchlng costs; a supplier may be more vulnerable to holdup in future contracts because Of dedicated assets ami/or expropriation of technology/knowledge. In lerms of the latt&r risk, consider ihe following example,'*'

An automobile component manufacturer wlhq ;t contract to supply an under-hoad comportent to nu original equipment manufacturer (OEM). A one-year, sole-source contraci safeguards the supplier's OEM-specific investments in a dedicated production line, However, the supplier may also lie obliged to work inn neon (mentally) as a partner with the OCM's internal engineeri«g staff (using linked computing facilities) to exchange detailed engineering Information and coordinaie frequent design add manufacturing changes over the term or the contract f'hese interactions could redttee costs and/or increase quality by improving the firm's responsiveness to marketplace changes. Such interactions could also potentially magnify the threat to the supplier's intellectual property.

U'iien buyers cannot easily mo nil or Supplier performance, the Supplier might shirk or cheat and not deliver the expected value, Opf)oriii)ii$ni can be thought of as "some form nf cheating or u tide rsnp ply relative to an implicit or explicit Contract.^ it may Involve blaiant self-interest and deliberate misrepresentation dial violates corUr;ietu;d agreements. In creating the 1996 version of the l-Ord Taurus, l-Ord Corporation chose to outsource the whole process to one supplier Lear Corporation. Leai committed to ;i contract that, lor various reasons, ii knetv it was unable lo fulfill. According io Ford, Ijoar missed eleadlines, failed u> meet weight and price objectives, and furnished parts that did not wfort,'111 A more passive form of opportunism might Involve a refusal qr unwillingness io adapt to changing cirvumsiances,

Opportunism is a concern because firms must devote resources lt> control and monitoring that otherwise could he allocaiud to more productive purposes. Ctmiraeis may become inadequate to govern supplier transaction* when supplier opportunism becomes difficult to detect; as firms make specific investments in assets that cannoi lie used elsewhere; an<l as contingencies are harder lu anticipate. Customers and suppliers are more likely lo form a join® venture (versus a simple Contract) wiien the supplier's degree (jf asset specificity is high, monitoring the supplier's behavior is difficult. arid the supplier has it prior Deputation,® tVheii a supplier has a good reputation, for example, it is more likely to avoid opportunism to protect this valuable Intangible asset.

Hie presence nf a significant future time boffcon and J or strong solidarity norms so that customers and suppliers are willing to strive for joint benefits can cause a shift in the effect of specific in vest men is. from expropriation (increased opportunism oii the receiver's part j to bonding (reduced opportunism).11

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