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This is to certify that the
dissertation entitled

THE EFFECT OF VERTICAL NETWORKS ON CHANNEL
GOVERNANCE ADAPTATION:
A TRANSACTION COST ECONOMICS APPROACH

presented by

Wesley Alan Pollitte

has been accepted towards fulﬁllment
of the requirements for the

 

 

 

 

 

Ph.D. degree in Marketing
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THE EFFECT OF VERTICAL NETWORKS ON CHANNEL
GOVERNANCE ADAPTATION:
A TRANSACTION COST ECONOMICS APPROACH
By

Wesley Alan Pollitte

A DISSERTATION
Submitted to
Michigan State University
in partial fulﬁllment of the requirements
for the degree of
DOCTOR OF PHILOSOPHY
Marketing

2008

 

 

ABSTRACT
THE EFFECT OF VERTICAL NETWORKS ON CHANNEL
GOVERNANCE ADAPTATION:
A TRANSACTION COST ECONOMICS APPROACH
By
Wesley Alan Pollitte

This dissertation extends transaction cost economics by incorporating a network
perspective to investigate the adaptation and safeguarding problems within a vertical
network marketing channel. This dissertation extends the transaction cost economics
perspective that dyadic relationships are not isolated transactions but are inﬂuenced by
the network in which they reside and must adapt to structural changes in the network,
thereby examining the boundary parameters of transaction cost economics. The
adaptation of the governance structure to safeguard the speciﬁc assets of the buyer is
necessitated by the addition of a new customer by a supplier in the buyer’s supplier
network. It is proposed that increased centrality of the supplier’s new customer in the
industry network will increase the buyer’s uncertainty and inﬂuence the governance
decision with the supplier. In addition, the density of the buyer’s supplier network
inﬂuences the governance decision by allowing the buyer to gather information and
reduce the uncertainty caused by the addition of the supplier’s new customer and reduce
the governance cost with the individual supplier. The results of this dissertation provide
evidence that dyadic relationships are inﬂuenced by the network in which they exist, and
a deeper understanding of adaptive governance is gained when a network perspective is
integrated with transaction cost economics logic. Four conclusions are drawn from the

results of this dissertation. First, the transaction cost economics prescriptions of

 

 

increased transaction asset speciﬁcity, behavioral uncertainty, and demand uncertainty in
a buyer-supplier dyadic relationship lead to increased vertical coordination with a
supplier are supported, providing nomological support and internal consistency of the
model. Second, supplier new customers occupying a central position in the industry
network increase the future buyer demand uncertainty in low demand uncertainty
environments and moderate the dyadic governance concerning buyer asset speciﬁcity.
Third, in low density buyer supplier networks, buyers increase the degree vertical
coordination with the supplier in low buyer demand uncertainty and high buyer
technological uncertainty environments. However, buyer supplier network density does
not inﬂuence the buyer’s degree of vertical coordination with the supplier concerning
buyer asset speciﬁcity and behavioral uncertainty, indicating that buyers use their
networks to reduce uncertainty external to the dyad but address concerns internal to the
dyad directly with the supplier. Finally, buyer supplier network density has a signiﬁcant
inﬂuence on governance choice. In low density buyer supplier networks, buyers opted
for market governance, and in high density buyer supplier networks, buyers choose to
continue purchasing form the current supplier when a new customer is added by the
supplier. The dissertation concludes with managerial implications and directions for

future research.

.d In! -' 1-;1. I .c ..

 

Corn/right by
Wesley Alan Pollitte
2008

 

DEDICATION

This is dedicated to the memory of my parents:
Janet M. Pollitte
and

William O. Pollitte

 

 

ACKNOWLEDGEMENTS

This dissertation would not have been possible without the support of many
people. I am deeply indebted to by committee chair David A. Grifﬁth for his guidance
and support throughout the many revisions. I would also like to thank the committee
members, Roger J. Calantone, S. Tamer Cavusgil, and Kenneth A. Frank for their expert
guidance and thoughtful comments. I would like to acknowledge the support of Joseph
Sandor for his help in contacting supply chain management professionals for the pre-test
portion of this dissertation. In addition, I would like to acknowledge the Institute for
Supply Management for providing access to its members in support of this dissertation.

I would also like to thank my fellow PhD candidates at Michigan State University
for their support and encouragement, especially my ofﬁcemate Serdar Durmusoglu for all
his guidance. Finally, I would like to thank my brother, Robert Pollitte, for all his

encouragement and support throughout my tenure in the Ph.D. program.

vi

TABLE OF CONTENTS

LIST OF TABLES ............................................................................................................. xi
LIST OF FIGURES .......................................................................................................... xii
CHAPTER ONE
MOTIVATION FOR THE DISSERTATION .................................................................... 1
INTRODUCTION ................................................................................................................ 1
PURPOSE OF THE STUDY ................................................................................................... 5
CHAPTER TWO
THEORETICAL BACKGROUND .................................................................................... 7
TRANSACTION COST ECONOMICS .................................................................................... 7
Dimensions of Transaction Cost Economics .............................................................. 9
Behavioral Assumptions of Transaction Cost Economics ........................................ 11
Governance Forms .................................................................................................... 15
NETWORK THEORY ........................................................................................................ I 7
Network Deﬁnition .................................................................................................... 18
Network Centrality .................................................................................................... 21
Network Density ........................................................................................................ 24
Safeguarding Problem in a Network Context ........................................................... 25
Adaptation Problem in a Network Context ............................................................... 27
SUMMARY ...................................................................................................................... 29
CHAPTER THREE
THEORETICAL MODEL AND HYPOTHESES ............................................................ 31
HYPOTHESIS DEVELOPMENT .......................................................................................... 32
Buyer Asset Specificity .............................................................................................. 32
Buyer Performance Ambiguity .................................................................................. 35
Buyer Demand Uncertainty ...................................................................................... 36
Buyer Technological Uncertainty ............................................................................. 38
Supplier New Customer Centrality ........................................................................... 39
Supplier New Customer Centrality (Moderator) ...................................................... 42
Buyer Supplier Network Density ............................................................................... 45

vii

CHAPTER FOUR

RESEARCH METHOD .................................................................................................... 53
VALIDATION OF VARIABLE MEASURES AND PRE-TEST .................................................. 54
EXPERIMENT METHOD AND DESIGN .............................................................................. 61

Sampling Frame ........................................................................................................ 61
Response Rate ........................................................................................................... 62
Sample Characteristics ............................................................................................. 62
Unit of Analysis ......................................................................................................... 62
Design and Procedure .............................................................................................. 63
DEPENDENT VARIABLE .................................................................................................. 65
Vertical Coordination ............................................................................................... 65
INDEPENDENT VARIABLES ............................................................................................. 66
Buyer Asset Specificity .............................................................................................. 66
Buyer Performance Ambiguity .................................................................................. 66
Buyer Demand Uncertainty ...................................................................................... 67
Buyer Technological Uncertainty ............................................................................. 67
Supplier New Customer Centrality ........................................................................... 68
Buyer Supplier Network Density ............................................................................... 68
CONTROL VARIABLES .................................................................................................... 69
Purchasing Frequency .............................................................................................. 69
Relationship Duration ............................................................................................... 69
Industry ..................................................................................................................... 69
Firm Size ................................................................................................................... 69
Gender ....................................................................................................................... 70

CHAPTER FIVE

RESULTS ......................................................................................................................... 71
TRANSACTION COST ECONOMICS PRESCRIPTIONS ......................................................... 71

Hypothesis One ......................................................................................................... 71
Hypothesis Two ......................................................................................................... 72
Hypothesis Three ...................................................................................................... 72
Hypothesis Four ........................................................................................................ 72
SUPPLIER NEW CUSTOMER CENTRALITY ....................................................................... 73
Hypothesis Five ......................................................................................................... 73
Hypothesis Six ........................................................................................................... 74
Hypothesis Seven ...................................................................................................... 75
BUYER SUPPLIER NETWORK DENSITY ........................................................................... 76
Hypothesis Eight ....................................................................................................... 76
Hypothesis Nine ........................................................................................................ 78
Hypothesis Ten .......................................................................................................... 79
Hypothesis Eleven ..................................................................................................... 81

Viii

 

CHAPTER SIX

THEORETICAL AND MANAGERIAL CONTRIBUTIONS OF THE STUDY ........... 83
THEORETICAL CONTRIBUTIONS ..................................................................................... 84
Transaction Cost Economics Prescriptions .............................................................. 84
Network Centrality .................................................................................................... 87
Network Density ........................................................................................................ 89
MANAGERIAL CONTRIBUTIONS ...................................................................................... 93
LIMITATIONS AND FUTURE RESEARCH DIRECTIONS ...................................................... 97
APPENDICES
APPENDIX 1: E-MAIL FROM CLINICAL PROFESSOR IN SUPPLY MANAGEMENT
SOLICITING SUPPLY CHAIN PROFESSIONALS PARTICIPATION IN RESEARCH ................ 101
APPENDIX 2:EXECUTIVE SUMMARY SENT To SUPPLY CHAIN
PROFESSIONALS SOLICITING PARTICIPATION IN RESEARCH ......................................... 102
APPENDIX 3: INITIAL E-MAIL SOLICITING SUPPLY CHAIN PROFESSIONALS
PARTICIPATION IN RESEARCH ...................................................................................... 104
APPENDIX 4: FOLLOW-UP EMAIL TO SOLICITING SUPPLY CHAIN PROFESSIONALS
PARTICIPATION m RESEARCH ...................................................................................... 106
APPENDIX 5: RESEARCH QUESTIONNAIRE OF ADAPTIVE RESPONSES
USED IN INTERVIEWS WITH SUPPLY CHAIN PROFESSIONALS ....................................... 107
APPENDIX 6: MEASURES-LITERATURE REVIEW ........................................................... 1 10

APPENDIX 7: PRE-TEST QUESTIONNAIRE SENT TO SUPPLY CHAIN PROFESSIONALS ..... 126
APPENDIX 8: SCRIPT FOR BUYER ASSET SPECIFICITY HIGH

AND DENSITY (WITHIN SUBJECTS) TREATMENT .......................................................... 129
APPENDIX 9: SCRIPT FOR BUYER ASSET SPECIFICITY Low

AND DENsrrY (WITHIN SUBJECTS) TREATMENT .......................................................... 132
APPENDIX 10: SCRIPT FOR BUYER ASSET SPECIFICTTY HIGH

AND CENTRALITY (WITHIN SUBJECTS) TREATMENT .................................................... 135
APPENDIX 1 1: SCRIPT FOR BUYER ASSET SPECIFICITY LOW

AND CENTRALITY (WITHIN SUBJECTS) TREATMENT .................................................... 138
APPENDIX 12: SCRIPT FOR BUYER BEHAVIORAL UNCERTAINTY HIGH

AND DENSITY (WITHIN SUBJECTS) TREATMENT .......................................................... 141
APPENDIX 13: SCRIPT FOR BUYER BEHAVIORAL UNCERTAINTY Low

AND DENSITY (WITHIN SUBJECTS) TREATMENT .......................................................... 144
APPENDIX 14: SCRIPT FOR BUYER DEMAND UNCERTAINTY HIGH

AND DENSITY (WITHIN SUBJECTS) TREATMENT .......................................................... 147
APPENDIX 15: SCRIPT FOR BUYER DEMAND UNCERTAINTY Low

AND DENSITY (WITHIN SUBJECTS) TREATMENT .......................................................... 150
APPENDIX 16: SCRIPT FOR BUYER TECHNOLOGICAL UNCERTAINTY HIGH

AND DENsrrY (WITHIN SUBJECTS) TREATMENT .......................................................... 153
APPENDIX 17: SCRIPT FOR BUYER TECHNOLOGICAL UNCERTAINTY LOW

AND DENSITY (WITHIN SUBJECTS) TREATMENT .......................................................... 156
APPENDIX 18: SCRIPT FOR BUYER BEHAVIORAL UNCERTAINTY HIGH

AND CENTRALITY (WITHIN SUBJECTS) TREATMENT .................................................... 159

ix

APPENDIX 19: SCRIPT FOR BUYER BEHAVIORAL UNCERTAINTY LOW

AND CENTRALITY (WITHIN SUBJECTs) TREATMENT .................................................... 162
APPENDIX 20: SCRIPT FOR BUYER DEMAND UNCERTAINTY HIGH
AND CENTRALITY (WITHIN SUBJECTS) TREATMENT .................................................... 165
APPENDIX 21: SCRIPT FOR BUYER DEMAND UNCERTAINTY LOW
AND CENTRALITY (WITHIN SUBJECTS) TREATMENT .................................................... 168
REFERENCES ............................................................................................................... 232
X

LIST OF TABLES

TABLE 12 TRANSACTION COST ECONOMICS EMPIRICAL STUDIES .................................... 176
TABLE 2: NETWORK CATEGORIES AND EXAMPLES OF RESEARCH ................................... 215
TABLE 32 NETWORK THEORY EMPIRICAL STUDIES .......................................................... 216

TABLE 4: PRE-TEST RESULTS OF TRANSACTION COST ECONOMICS AND CONTROL
VARIABLES .............................................................................................................. 221

TABLE 52 PRE-TEST RESULTS OF BUYER SUPPLIER NETWORK DENSITY AND

SUPPLIER NEW CUSTOMER CENTRALITY ................................................................. 222
TABLE 6: SAMPLE CHARACTERISTICS .............................................................................. 223
TABLE 7: RESULTS-VERTICAL COORDINATION ................................................................ 226
TABLE 8: RESULTS-GOVERNANCE CHOICE ...................................................................... 229

xi

LIST OF FIGURES

FIGURE 12 INTERCONNECTION OF SUPPLIER IN BUYER NETWORK WITH SUPPLIER NEW

CUSTOMER NETWORK ............................................................................................. 171
FIGURE 2: GOVERNANCE COSTS AS A FUNCTION OF ASSET SPECIFICITY ......................... 172
FIGURE 3: CENTRALITY IN A NETWORK ........................................................................... 173
FIGURE 4: VERTICAL NETWORK DENsrrY ........................................................................ 174
FIGURE 5: THEORETICAL MODEL ..................................................................................... 175

xii

 

CHAPTER ONE

MOTIVATION FOR THE DISSERTATION

Introduction

Marketing channel governance has received considerable attention in the
marketing literature. Traditionally, marketing channel governance research has relied on
transaction cost economics to prescribe the efﬁcient form of governance of an exchange
relationship (Geyskens et a1. 2006; Heide 1994; Rindﬂeisch and Heide 1997). The
majority of the research has concentrated on the dyadic exchange relationship between
the buyer and the supplier. In the last two decades, manufacturers have been moving
away from the traditional vertical integration form of governance to a network of
autonomous suppliers (Achrol and Kotler 1999; Anderson et a1. 1994). Companies such
as General Motors, Boeing, Ford, Microsoft, and IBM have subcontracted activities vital
to their production that were once vertically integrated (Lunsford 2007; Stremersch et a1.
2003). Managing a network of suppliers presents buyers with challenges in controlling
resources and adapting to changes in the buyer’s supplier network as network
membership changes. The prominent focus of research on dyadic exchanges in
marketing channel literature to date has led to relatively few studies addressing the
inﬂuence of network organization in the study of channel governance, and authors have
called for research integrating a network perspective with transaction cost economics
(Geyskens et a1. 2006; Wathne and Heide 2004; Williamson 1991).

Transaction cost economics has been useful in prescribing the structure of

interorganizational governance based on the transaction cost of safeguarding transaction

r

 

speciﬁc assets and adapting to environmental uncertainty (Williamson 1985; 1975). The
primary proposition that increasing transaction cost leads to vertical integration has
received support in the literature (Geyskens et al. 2006; Rindﬂeisch and Heide 1997).
However, transaction cost economics focuses on the dyadic and neglects the inﬂuence of
other entities in the network. Williamson (1985, p. 393) recognized this limitation,
“Although transaction cost economics insistently addresses both ex ante and ex post E-
conditions of the contract,. . .it normally examines each trading nexus

separately. . .interdependencies among a series of related contracts may be missed or

undervalued as a consequence. Greater attention to the multilateral ramiﬁcations of

 

T! r.. I A".AI ‘n-

contract is sometimes needed.” By considering the inﬂuence of the network on dyadic
relationships, another dimension is added to our understanding of interorganizational
governance. Incorporating a network approach with transaction cost economics allows
the consideration of optimizing not just a single relationship but a ﬁrrn’s entire network
of relationships (Anderson et al. 1994; Geyskens et a1. 2006).

Researchers have suggested that to fully understand the dyadic relationship in
interorganizational governance, research should incorporate the effect of the network in
which the dyadic relationship resides (Achrol 1997; Achrol and Kotler 1999; Anderson et
al. 1994; Iacobucci 1996). Research in network governance of marketing channels has
begun to address the relationship between dyadic exchange and the inﬂuence of network
dimensions in buyer-seller relationships. Research applying network analysis to dyadic
exchange relationships has investigated channel adaptation (Wathne and Heide 2004),
cooperation (Iacobucci and Hopkins 1992), contract enforcement (Antia and Frazier

2001), and stability (Gadde and Mattsson 1987). The results of these empirical studies

suggest that the network where the dyadic relationship resides inﬂuences the governance
of the focal relationship (Powell and Smith-Doerr 1994), but little research has addressed
how exchange relationships adapt to changes in network structure to account for
uncertainty and safeguarding of assets invested with members of a buyer’s supplier
network.

This dissertation investigates the adaptation of dyadic interorganizational
governance in a network context due to the addition of a new customer by a supplier in a
buyer’s supplier network (See Figure 1), thereby extending the analysis of the adaptation
and safeguarding problems of transaction cost economics to include a network
perspective. The adaptation by organizations to uncertainty in the presence of nontrivial
transaction Speciﬁc assets is a fundamental prescription of transaction cost economics
(Williamson 1985; 1975). Failing to adapt the dyadic governance to account for changes
in the network structure surrounding the dyad introduces maladaptation costs
(Williamson 1991). Considering network effects on dyadic governance provides an
efﬁcient means of acquiring information to reduce governance cost. Supplier networks
allow purchasing organizations to access information within the network to enhance
innovation (Bell 2005; Zaheer and Bell 2005) and provide ﬂexibility to adapt to
technological changes within the market (Balakrishnan and Wemerfelt 1986). The ability
to adapt to change in a marketing channel organized as a network of autonomous
suppliers represents a departure in managing a marketing channel as a vertical integrated
organization. The beneﬁts of a network of suppliers are realized from the ability to
access information from members of the network and the ﬂexibility of the buyer to add

and subtract members to access the advances in technology (Powell and Smith-Doerr

 

1994). However, the beneﬁts of the network are countered by the loss of control of
information (Oxley 1999; Williamson 1991) and dependence on suppliers (Cook and
Emerson 1978). To reap the beneﬁts of a network of suppliers and guard against
opportunistic behavior, the buyer must strike a balance between sharing and restricting
information with suppliers by adapting governance mechanisms as changes in the
network arise.

This research postulates that the effect of a supplier in a buyer’s supplier network
adding a new customer to the network will be contingent on the centrality of the new
customer in the industry network and the density of the buyer’s supplier network.
Supplier new customer centrality is the number of organizations an organization can
access independently (Freeman 1979) and translates into the inﬂuence an organization
has within the industry network (Boje and Whetten 1981). The density of the buyer’s
supplier network inﬂuences the ability of the buyer to access information and is
dependent on the extent of interconnection among the organizations of the buyer’s
supplier network (Coleman 1988). The network dimensions of centrality and density can
have considerable inﬂuence on the level of uncertainty concerning the governance
between the buyer and supplier (Burt 1992b; Coleman 1988). The addition of the new
customer by the supplier may require the buyer to adapt the governance with the supplier
due to changes in uncertainty and potential of opportunistic behavior. If the supplier’s
new customer’s centrality in the industry network is high, then the level of buyer
uncertainty and the threat of information leaking to the new customer will increase,
increasing the likelihood the buyer will adapt the governance to reduce uncertainty and

safeguard assets. The density of the buyer’s supplier network serves to moderate the

uncertainty and potential for opportunism. If the density of the buyer’s supplier network
is high, then the buyer can gather information through its supplier network to decrease
the uncertainty and detect and sanction opportunistic behavior (Granovetter 1985),
decreasing the likelihood of the buyer adapting the governance directly with the supplier.
To date, the research of network organization of marketing channels is only
beginning to address how dyadic exchange relationships are inﬂuenced by other members
of a network (Antia and Frazier 2001; Iacobucci 1996; Iacobucci and Hopkins 1992;
Wathne and Heide 2004). In a study examining the effect of governance in a supply
chain, Wathne and Heide (2004) showed that ﬂexibility of downstream customers was
dependent on the governance mechanisms of upstream suppliers. The ﬂexible nature of
supplier networks introduces a new form of uncertainty into existing dyadic buyer-
supplier relationships. Adaptation of the governance structure to this form of uncertainty
is a fundamental issue of network marketing channels. Managers of suppliers and buyers
alike confront the possibility of having to renegotiate the governance structure of
exchange relationships when a supplier in a buyer’s network adds a new customer or

incur maladaption costs (Grossman and Hart 1986; Williamson 1991).

Purpose of the Study

The purpose of this study is to extend transaction cost economics by incorporating
a network perspective to investigate the adaptation and safeguarding problems within a
vertical network marketing channel. AS highlighted in the introduction, research
investigating interorganizational relationships has focused on dyadic exchange. As
organizations have increasingly adopted vertical network marketing channels, the

importance of understanding the inﬂuences of the network on a dyad within the network

has grown (Geyskens et al. 2006; Wathne and Heide 2004). Analysis of dyads
independent of network inﬂuences does not provide a complete understanding of the
exchange relationship (Achrol and Kotler 1999; Antia and Frazier 2001 ).

This research extends the analysis of the adaptation and safeguarding problems of
transaction cost economics. In this research, the adaptation of the governance structure to
safeguard the speciﬁc assets of the buyer is necessitated by the addition of a new
customer by a supplier in the buyer’s supplier network. This research contributes to the
literature by extending transaction cost economics by incorporating a network perspective
in the analysis of adaptation to unanticipated events of dyadic exchange relationships,
thereby examining the boundary parameters of transaction cost economics. As a
fundamental paradigm in interorganizational governance, transaction cost economics
incorporating network inﬂuences provides a greater understanding of exchange
relationships in vertical supplier networks where vertical integration is no longer the
primary option for controlling transaction costs.

This dissertation is organized as follows. Chapter Two provides an overview of
the theoretical background of transaction cost economics and network theory. Chapter
Three presents the theoretical model and hypotheses. Chapter F our discusses the
research design. Chapter Five presents the results. Chapter Six discusses the theoretical

and managerial contributions of the research.

r."

 

q hmm-lm.}:4-. . I .
1

CHAPTER TWO

THEORETICAL BACKGROUND

The understanding of the mechanisms of interorganizational governance in
marketing has been greatly inﬂuenced by transaction cost economics (Geyskens et al.
2006; Heide 1994; Rindﬂeisch and Heide 1997; Wathne and Heide 2004). Recent
research in marketing has begun to extend transaction cost economics by investigating
the effect of being embedded in a network on the dyadic relationship (Anderson et al.
1994; Antia and Frazier 2001; Gadde and Mattsson 1987; Iacobucci and Hopkins 1992;
Wathne and Heide 2004). This dissertation builds on this stream of research by
incorporating network effects in transaction cost economic analysis of interorganizational
relationships and by investigating how a buyer adapts its governance structure due to the
addition of a new customer by one of its suppliers in its supplier network. This chapter
ﬁrst presents an overview of the dimensions and behavioral assumptions of transaction
cost economics followed by an overview of network theory. The chapter concludes with
a discussion of the inﬂuence a network has on the classical safeguarding and adaptation

problems advanced by transaction cost economics.

Transaction Cost Econ om ics

Transaction cost economics has become a dominant paradigm in the literature for
explaining interorganizational governance and belongs to the “New Institutional
Economics” paradigm (Rindﬂeisch and Heide 1997). Coase (193 7) proposed that the
existence of the ﬁrm was due to market failure where the ﬁrm is able to organize labor

and production more efﬁciently. Building on Coase’s insights, Williamson (1975)

 

proposed the efﬁciencies of an exchange were determined by the attributes of the
transaction and ﬁrms economized on the cost of the transaction rather that the cost of
production prominent in neoclassical economics. Transactions cost economics takes the
View that exchanges are a form of contract between two exchange partners where the
transaction is the unit of analysis. Transaction cost economics incorporates the ex ante
costs, such as drafting, negotiating, and safeguarding the contract, and ex post costs, such
as monitoring and enforcing the contract. Information asymmetry between the exchange
parties complicates the organization and execution of the transaction, increasing the
transaction cost of the exchange (Dutta et al. 1999). The governance structure is
organized around the transaction to minimize cost and reduce information asymmetry to
the actors involved (Williamson 1985). The governance structure is either organized as a
market transaction, for simple exchanges, or is integrated into the ﬁrm, for complex
exchanges. A third form of governance, hybrid governance, where the parties remain
autonomous but are dependent, has emerged as a form of governance that is intermediate
to market and hierarchical forms of governance (Heide 1994; Williamson 1991 ).
Transaction cost economics proposes that the dimensions of the exchange
determine the most efﬁcient governance structure (Williamson 1985; 1975). Depending
on the dimensions of the exchange, transaction cost economics provides a prescription for
the choice of governance to minimize transaction cost and exposure to risk.
Organizations entering into exchanges are exposed to hazards of opportunism and
maladaptation due to an inherent degree of incompleteness of the contract Where all
possible contingencies cannot be explicitly known in advance (Grossman and Hart 1986;

Williamson 1975). Organizations that enter into these exchanges and invest in

‘10 W“ M

transaction speciﬁc assets expose themselves to expropriation of these assets and the cost
of governance structure misalignment as changes in the external environment occur
(Heide and John 1988). As rationale actors, managers of organizations entering into an
exchange compare governance structures to minimize the transition costs and choose the
most efﬁcient governance form .for managing exposure to hazards of opportunism and
maladaptation. According to transaction cost economics, the dimensions of the exchange
that determine the governance structure are transaction speciﬁc assets, environmental
uncertainty, behavioral uncertainty, and transaction frequency (Williamson 1985; 1975).
In addition, the behavioral assumptions of the actors engaged in the transaction are
opportunism, bounded rationality, and risk neutrality (Williamson 1985; 1975). Table 1
presents empirical studies of transaction cost economics of interorganizational
relationships. The four dimensions and three behavioral assumptions will discussed
individually next.

Dimensions of Transaction Cost Economics. The ﬁrst dimension is transaction
speciﬁc assets, or asset speciﬁcity. Asset speciﬁcity refers toinvestments that are
undertaken in support of a particular transaction, the opportunity cost of which
investments is much lower in best alternative uses or by alternative users should the
original transaction be prematurely terminated (Williamson 1985). Asset speciﬁcity is
the principle dimension within transaction cost economics. Asset speciﬁcity can be in the
form of site speciﬁcity, physical asset speciﬁcity, human asset speciﬁcity, and dedicated
assets (Williamson 1985). As asset speciﬁcity increases, as part of an exchange, the
ability to redeploy the assets decreases and the bilateral dependency between parties

increases (Heide and John 1988). As transaction speciﬁc assets increase, the potential for

opportunistic behavior increases and leads to a safeguarding problem to prevent
expropriation of the assets or ensure collection of rents generated from the assets. A
fundamental proposition of transaction cost economics is when asset speciﬁcity increases
the cost of managing and safeguarding these assets increases (Williamson 1985; 1975).
When the transaction costs exceed the cost of market governance, organizations
internalize the exchange since the relative transaction cost of hierarchical governance to
manage and safeguard these assets is lower than market governance (Anderson 1985;
Heide et al. 1998; Williamson 1985; 1975).

The second dimension is environmental uncertainty. Williamson (1985) argues
that uncertainty has an inﬂuence on the governance structure. He proposes two types of
uncertainty, environmental uncertainty which is exogenous to the exchange and
behavioral uncertainty which is attributable to human action of the exchange partners. In
his classic works, Williamson did not explicitly deﬁne environmental uncertainty. Later
research, deﬁned environmental uncertainty as unanticipated changes in circumstances
surrounding an exchange (Noordewier et al. 1990). Proposing that environmental
uncertainty is a multidimensional construct, Walker and Weber (1984) distinguish
between demand uncertainty, the inability to accurately forecast the volume
requirements, and technological uncertainty, the inability to accurately forecast the
technical requirements, as factors that comprise environmental uncertainty.
Environmental uncertainty combined with bounded rationality leads to a problem of
adaptation due to the incompleteness of contracts to specify all possible contingencies
(Grossman and Hart 1986). When asset Speciﬁcity is present to a nontrivial degree,

environmental uncertainty increases the transaction cost due to the need for renegotiation

10

 

4|

of contracts (Williamson 1985; I975). Transaction cost economics proposes that high
levels of environmental uncertainty combined with nontrivial asset speciﬁcity will lead to
a greater degree of hierarchical governance (Williamson 1985; 1975).

The third dimension is behavioral uncertainty. Behavioral uncertainty is deﬁned
as the difﬁculty in ascertaining ex post whether contractual compliance has taken place

(Williamson 1985; 1975). Behavioral uncertainty combined with bounded rationality

—lﬁq'

leads to a performance evaluation problem. As behavioral uncertainty increases the cost

ni'

of monitoring supplier compliance increases, and buyer can exert greater control at a

lower cost within the organization to monitor compliance. Transaction cost economics

“A “._._

postulates that as behavioral uncertainty increases, in the presence of nontrivial asset
speciﬁcity, the likelihood of vertical integration increases (Buvik and John 2000;
Williamson 1985; 1975).
The fourth dimension is transaction frequency. Transaction frequency refers to

how often transactions occur between exchange partners. Williamson (1985, p. 60)
recognized the importance of transaction frequency and that ‘specialized governance
structures are more sensitively attuned to the governance needs of nonstandard
transactions than are unspecialized structures.’ For recurring transactions, investments in
specialized assets will be easier to recover for larger transactions. Thus, transaction cost
economics postulates a conditional effect. If asset speciﬁcity is nontrivial, then the cost
of hierarchical governance for a high transaction ﬁequency will be higher than the cost of
market governance, leading to hierarchical governance (Williamson 1985; 1975).

Behavioral Assumptions of Transaction Cost Economics. The ﬁrst behavioral

assumption of transaction cost economics is bounded rationality. Bounded rationality is

11

the semi-strong form of rationality where economic actors are ‘intentionally rational, but
only Iimitedly 80’ (Simon 1961). The semi-strong form stipulates that human minds are
limited cognitively and do not have access to all available information. Thus, concerning
governance structure decisions, economic actors assign transactions in a discriminating
way (Williamson 1985). Bounded rationality when combined with uncertainty, both
environmental and behavioral, operates in the ex ante and ex post phases of the exchange.
In the ex ante phase, it limits economic actors from writing complete contracts that
account for every possible future contingency (Grossman and Hart 1986). In the ex post
phase, it creates a performance evaluation problem in regards to contract compliance and
adaptation to changes in the external environment. Transaction cost economics
postulates that uncertainty, both behavioral and environmental, increases the cost to
monitor and adapt contracts will increase, leading to a desire for greater control and a
greater likelihood of hierarchical governance (Williamson 1985; 1975)

The second assumption is opportunism. Opportunism is deﬁned as ‘self-interest
seeking with guile’ (Williamson 1985; 1975). Opportunism is the strong form of self-
interest and includes, but is not limited to, blatant forms, such as lying, stealing, and
cheating and subtle forms of deceit. Opportunism can be present either ex ante or ex post
(John 1984; Wathne and Heide 2000). Ex ante opportunism may involve deliberate
misrepresentation, due to information asymmetry, by parties during the negotiation of an
exchange, leading to a problem of adverse selection. Ex post opportunism involves
violations of the contract over the duration of the agreement, leading to a problem of
moral hazard. Transaction cost economics postulates that in situations where asset

speciﬁcity is nontrivial the cost to protect against opportunism will increase, leading to a

12

desire for greater control and greater likelihood of hierarchical governance (Provan and
Skinner 1989; Rokkan et al. 2003; Williamson 1985; 1975).

In the study of interorganizational relationships, opportunism emerges as a central
construct and is increasingly relevant in the presence of nontrivial asset speciﬁcity. In
conjunction with the adaptation problem, Williamson (1993) notes that bounded
rationality alone would never give rise to the interesting economic organization problems
in the absence of opportunism. Without considering opportunism, parties to a contract
could adjust to unanticipated disturbances by self-enforcement of agreements and no ex
post maladaption problems would arise. However, considering opportunism, where each
party will attempt to maximize its position due to unanticipated events introduces
substantial governance costs into the organization of interorganizational relationships.
Since partners to an exchange are well-socialized, opportunism is not present in each
transition; however, transaction cost economics recognizes that a partner may act
opportunistically (Williamson 1993).

The third assumption is risk neutrality. Risk neutrality is the least studied of the
three assumptions. Williamson (1991) conceptualizes risk neutrality as a point where
ﬁrms are indifferent between market and hierarchy governance, and researchers have
interpreted risk neutrality as deﬁned in neoclassical economics (Chiles and McMackin
1996). Contrasting risk neutrality to risk adverse and risk seeking positions, a risk neutral
position assumes a position between the two extremes. Chiles and McMackin (1996)
propose that the risk position a ﬁrm takes will inﬂuence the choice of governance relative
to the asset speciﬁcity leVel. Firms that are risk seeking will continue to transact in the

market at higher levels of asset speciﬁcity than risk neutral or risk adverse ﬁrms, and risk

13

adverse ﬁrms will vertically integrate at lower levels of asset speciﬁcity than risk neural
or risk seeking ﬁrms.

Extensive empirical studies have been conducted using the transaction cost
economics framework in the business disciplines of accounting, ﬁnance, marketing, and
organizational theory, as well as, law, political science and economics (David and Han
2004; Geyskens et al. 2006; Rindﬂeisch and Heide 1997; Shelanski and Klein 1995).
This body of research has been generally supportive of governance choice being largely
determined by the cost of transactions and the characteristics underlying the ﬁamework.
In qualitative studies of the tenants of transaction cost economics (David and Han 2004;
Rindﬂeisch and Heide 1997; Shelanski and Klein 1995), strong support is found for
propositions concerning asset speciﬁcity and the safeguarding of these assets from
opportunistic behavior. Mixed support is offered for the role of governance concerning
environmental uncertainty and adaptation and behavioral uncertainty and performance
evaluation proposed by transaction cost economies. In a quantitative meta-analysis,
Geyskens, Steenkamp and Kurnar (2006) ﬁnd strong support for the role of governance in
asset speciﬁcity and the safeguarding problem. The authors ﬁnd that elevated volume
and behavioral uncertainty promote a choice of hierarchal governance over market
governance. Conversely, increased technological uncertainty promotes market
governance over hierarchical governance, suggesting organizations desire ﬂexibility to
adapt to new technology. In addition, the authors suggest that relational governance may
be a more suitable alternative than market governance when an organization is confronted
with high volume or technological uncertainty if it is embedded in a network that allows

a ﬁrm the ﬂexibility of using different production facilities and access to alternative

14

technology. The results of these qualitative and quantitative studies, comprised of 30
years of empirical research, demonstrates the usefulness of transaction cost economics as
a robust approach for predicting interorganizational governance choice.

Governance Forms. Williamson (1985; 1975) originally proposed two forms of
governance structure, market and hierarchy, culminating from the attributes of the
transaction. A ﬁrndamental proposition of this conceptualization is as transaction costs
exceed the cost of governing a market exchange, organizations would internalize the
exchange in the form of vertical integration. Further reﬁnement of the outcome of
exchange led to an intermediate form of hybrid governance, where two organizations
engaged in the exchange remained independent but incorporated some of the features of
market and hierarchical governance (Williamson 1991). Williamson (1991) argues that
the form of governance in a bilateral relationship will be determined by a combination of
the transaction speciﬁc assets and governance cost arising from adaptation. Figure 2,
adopted from Williamson (1991), shows the relationship between asset speciﬁcity and
governance cost and the resulting governance structure. In this conceptualization, the
most efﬁcient governance structure depends on the level of asset speciﬁcity invested in
the relationship by each of the partners. If k* is the optimal value of k, where k is the

level of asset Speciﬁcity invested in the exchange relationship, then the efﬁcient level of

asset speciﬁcity is use markets for k* < k1, use hybrids for k1 < k* < k2 , and hierarchy

for k* > k2 . Moving to the right along the curves implies increasing governance cost and

escalating application of controls for governing the relationship. Increasing governance
costs due to adaptation have the effect of shifting the optimal value of k* to the left, and

decreasing governance costs shift the optimal value of k* to the right. For instance, in the

15

Vicinity of k2 , decreases in governance cost would shift k2 to the right, increasing the
asset speciﬁcity level that hybrid governance would support. Conversely, increases in
governance cost would shiﬁ k2 to the leﬁ, decreasing the asset speciﬁcity that hybrid
governance would support.

The distinguishing characteristics of the three governance structures are the costs
of different coordination and control mechanisms and the ability to govern transactions.
Accordingly, the governance costs are dependent on the asset speciﬁcity of the exchange
and the need to protect these assets in the face of uncertainty (Williamson 1991).
Uncertainty increases the governance costs due to the threat of expropriation and leakage
of information. As expropriation and leakage hazards increase, the amount of transaction
speciﬁc assets needed to support hybrid governance decreases in favor of hierarchical
governance. In other words, as the cost of adapting to uncertainty increases,
organizations will tend to favor hierarchical governance as the efﬁcient form of
governance for decreasing levels of asset speciﬁcity.

Heide (1994) further reﬁned the conceptualization of governance structure by
providing a typology of market, unilateral/hierarchical, and bilateral governance forms
accompanied with the distinguishing features in the imitation, maintenance, and
termination phases of the exchange relationship. In a unilateral form of
interorganizational governance, the exchange parties remain separate and one party is
granted authority to develop rules and make decisions. Disputes are managed internal to
the relationship and contracts are used to enforce compliance of the exchange. In
bilateral interorganizational governance, exchange parties develop closer ties with

overlapping roles and joint responsibilities, providing a framework for subsequent

16

‘1 “_W‘] J:_AE"T
u

adaptation through mutual adjustment (Macneil 1980), and agreements are enforced
through the use of common interests and expectations of future continuance (Heide and

Miner 1992).

Network Theory

A dyadic relationship between a buyer and a supplier does not exist in isolation
impervious to unanticipated external events. An important factor inﬂuencing an
organization’s environment is the network in which it resides (Powell and Smith-Doerr
1994). The dyad exists as part of a larger network of buyers and suppliers.
Conceptually, a network consists of large number of actors and the pattern of
relationships that tie them together (Iacobucci and Hopkins 1992). For example, in the
automotive industry, U.S. automakers use an extensive network of independent suppliers
(Dyer 1996b), ranging from suppliers of standardized components to collaborative
research and development (Sako and Helper 1998). Networks contain a multitude of
individual dyads linking suppliers to other suppliers and buyers. When a supplier adds a
new customer, the dyadic relationship between the supplier and the buyer is inﬂuenced
by the change to the buyer’s supplier network. The change in the network will introduce
uncertainty and the potential for opportunistic behavior if nontrivial asset speciﬁcity is
present in the dyadic relationship between a buyer and supplier (Antia and Frazier 2001;
Wathne and Heide 2004). Accounting for the inﬂuence of the network moves transaction
cost economics beyond the analysis of discrete exchanges and incorporates a perspective
based on the position of other economic actors in a network and the structure of a

network.

17

A

This section introduces concepts from network theory and the inﬂuence these
dimensions have on the degree of uncertainty and the potential for opportunism
experienced in a dyadic exchange relationship between a buyer and supplier.
Speciﬁcally, the focus of this section will be on the structural constructs of centrality and
density. Where centrality refers to the position an organization occupies in a network,
and denotes the extent to which the organization occupies a strategic position in a
network by virtue of being involved in many signiﬁcant ties (Wasserrnan and Faust
1994). Density is the extent of interconnection among the actors of a network (Coleman
1988). An organization’s position in a network (centrality) and structural characteristics
of a network (density) affects the ﬁrrn’s ability to access information (Gnyawali and
, Madhavan 2001) and changes in the position of ﬁrms within a network introduces
uncertainty to other members of the network (Gadde and Mattsson 1987). This section
proceeds with a discussion on the use of network theory in the marketing literature, a
deﬁnition of networks, the constructs of centrality and density of a network, and the
application of network theory to the safeguarding and adaptation problems of transaction
cost economics.

Network Definition. Originating in the ﬁeld of sociology, network theory has
been used extensively in organizational theory to investigate relationships between
individuals and organizations (Parkhe et a1. 2006). In the organizational theory literature,
networks have been described as “network organization” (Miles and Snow 1986),
“network forms of organization” (Powell 1990), “interﬁrrn networks” (U zzi 1997; Uzzi
1996) and “quasi-ﬁrms” (Eccles 1981). Network theory has grown in its use in the

marketing literature (Achrol and Kotler 1999), and has been applied to the structure of

18

marketing organizations (Achrol 1991), dyadic business relationships (Anderson et al.
1994; Antia and Frazier 2001; Gadde and Mattsson 1987; Iacobucci and Hopkins 1992;
Wathne and Heide 2004), and relationship marketing (Hakansson and Snehota 1995;
Iacobucci 1996; Moller and Wilson 1995). In dyadic relationships between buyers and
suppliers, networks provide a form of governance structure intermediate to pure market
and hierarchical governance (Jones et al. 1997). Network structure inﬂuences the power
and cooperation within dyads (Iacobucci and Hopkins 1992) and access to information in
new product alliances (Rindﬂeisch and Moorrnan 2001). While the majority of research
has focused on the relational or structural aspects of network theory for either
coordinating or governing relationships, less research has been directed at the effect
networks have in introducing or controlling uncertainty in dyadic relationships.
Researchers have urged multi-level analysis of relationships at the ﬁrm and network
levels to enhance the richness of theory development of dyadic interorganizational
relationships (Achrol 1997; Achrol and Kotler 1999; Iacobucci and Hopkins 1992).

Researchers in the marketing literature have offered varying deﬁnitions of
network organization (Anderson et al. 1994; Antia and Frazier 2001; Iacobucci and
Hopkins 1992). Fundamentally, a deﬁnition of network organization includes the
existence of two or more economic actors and the pattern of ties between the actors.
Achrol and Kotler (1999) deﬁne a network organization as:

An independent coalition of task- or Skill-specialized economic entities

(independent ﬁrms or autonomous organizational units) that operates

without hierarchical control but is embedded, by dense lateral connections,

19

mutuality, and reciprocity, in a shared value system that deﬁnes

“membership” roles and responsibilities.

The deﬁnition recognizes the important feature of embeddedness which differentiates it
ﬁom other forms of organization (Granovetter 1985), and the dependence of
organizations on other ﬁrms in the network connected by either direct or indirect ties
(Cook and Emerson 1978).

Achrol and Kotler (1999) further distinguish between four types of network
organizations: vertical networks, internal networks, intermarket networks, and
opportunity networks. The function of each network and examples of research are
presented in Table 2. Achrol and Kotler (1999) deﬁne a vertical network as:

A group of resource ﬁrms specializing in the various products,

technologies, or services that constitute the inputs of a particular industry,

organized around a focal company (sometimes a “virtual” company) that

focuses on monitoring and managing the critical contingencies faced by

the network participants.

In this conceptualization, the network consists of suppliers and distributors organized
around a focal ﬁrm (buyer). The focal ﬁrm performs few manufacturing functions and
serves as an “integrator” to organize and coordinate the organizations in the network
(Achrol and Kotler 1999). The ability of the buyer to organize the network allows the
buyer to change membership of the network to meet the buyer’s needs and sanction
members for behavior contrary to the shared expectations of the network (Granovetter

1985; Rowley 1997).

20

A vertical network organized around a focal organization develops a group
identity with shared routines, technology, and behavioral expectations (Dyer and
Nobeoka 2000). Organizations within the vertical network share technology and develop
procedures to transfer knowledge among the members to enhance innovation (Bell 2005;
Zaheer and Bell 2005). The vertical network constitutes a resource to the focal
organization and a source of competitive advantage in the marketplace (Achrol 1997;
Achrol and Kotler 1999). Being a source of competitive advantage, the focal
organization may react with a sense of trepidation when suppliers work with
organizations outside the network. Suppliers working with organizations outside the
network may provide information to their new customers that may erode the competitive
advantage of the focal organization. The intrusion of a supplier’s new customer into the
network suggests that the focal organization may perceive an increased threat of
opportunism and increased uncertainty about the intentions of the new customer. To
reduce the threat of opportunism and uncertainty, the focal organization will need to
adapt its dyadic relationships with suppliers engaging in sales to organizations new to the
network.

Network Centrality. Network theory builds on the perspective that economic
actions are inﬂuenced by the social context in which they are embedded and are
inﬂuenced by the position of organizations in the network (Gulati 1998). Network theory

focuses on informational and control advantages accorded organizations by virtue of their

relational1 and structural embeddedness within the network. The relational and structural

embeddedness perspectives often overlap, since control advantage can arise from control

 

1 Relational embeddedness is deﬁned as the ‘personal relationships people developed with each other
through a history of interactions.’

21

of information (Burt 1992b). Relational embeddedness stresses the informational
beneﬁts of direct ties for gaining ﬁne-grained information (Krackhardt 1992) where
organizations possess common information and knowledge of each other and
organizations develop a shared understanding of behavior that inﬂuence their actions
(Coleman 1988). Structural embeddedness emphasizes the informational value of
occupying a position in the network where information ﬂows through not only the
individual ties, but also through the network itself (Gulati 1999; Gulati 1995b).
Structural embeddedness is deﬁned as the ‘impersonal conﬁguration of linkages
between people or units’ (N ahapiet and Ghoshal 1998). The informational beneﬁts of

structural embeddedness are dependent on the centrality and density of the network, as

measured by the number of ties between organizationsz, where ﬁrms with a greater
number of ties have access to greater amounts of information (Coleman 1988; Krackhardt
1992). The centrality of an organization and the density of the network capture the
informational and control beneﬁts of network position and structure (Coleman 1988;
Krackhardt 1992). Table 3 presents empirical studies of network centrality and density.
Centrality has been measured as of degree of centrality, closeness, and
betweenness (Freeman 1979; Krackhardt 1992; Wasserman and Faust 1994). Degree of
centrality is the simplest measure of centralin and refers to the number of ties with other
organizations in the network. Freeman (197 9) conceptualized degree of centrality as a
measure of activity. From an exchange perspective, the degree measure of centrality

represents the number of alternatives available to an organization. Closeness is the

 

Ties between organizations are categorized as either weak or strong ties. The difference In the ties rests
on the magnitude and content of information accessed through the ties with other organizations, such as the
frequency, intensity, and conﬁguration.

22

organization’s ability to access independently all other members of the network, and
provides a measure of how quickly an organization can interact with other ﬁrms in
receiving and communicating information (Freeman 1979). Closeness is interpreted as a
measure of efﬁciency and the ability to avoid the control of others. Betweenness is the
degree to which an organization lies between other organizations (Wasserman and Faust
1994). Betweenness measures the extent to which actors fall between pairs of other
organizations on the shortest path connecting them (Freeman 1979) A central
organization occupying a position between other organizations has the ability to mediate
a communication between other organizations by withholding or distorting information
(Burt 1992b).

Figure 3 presents a ten organization network (Cook et al. 1983). For closeness

and betweenness measures of centrality, organization A occupies the most central

location in the network followed by organizations B1, B2, and B3 then organizations C13,
Clba C23, C2b, C33, and C31,. Measuring the direct linkages only, the degree of centrality
for organizations A and organizations B1, Bz, and B3 are equal but greater than
organizations Cla, C11,, C23, C21,, C3a, and C31,. By being situated between organizations
B1, Bz, and B3, organization A is able to independently access and mediate information
between each of the Bx organizations. Through each of the organizations (B1, Bz, and

B3), organization A is also able to indirectly access each of the ny organizations. In this

network, organization A has greater access to more sources of information and control of

23

information and is potentially more powerful than the other members of the network
(Brass and Burkhardt 1992; Freeman 1979).

Centrality is associated with an organization’s status within the network (Podolny
1993). The status of a central organization signals to other members of the network its
reputation as a potential exchange partner (Raub and Weesie 1990). The ability to signal
to other members of the network reduces uncertainty and search costs when developing
relationships with central organizations (Gulati 1995b). Having greater access to
information elevates the inﬂuence of an organization within the network (Boje and
Whetten 1981). A central organization’s inﬂuence stems from its position in the network
and its ability to broker the ﬂow of valued resources and mobilize resources controlled by
others (Raub and Weesie 1990). By being situated between organizations, a central
organization has access to unique information from multiple sources (Shan et al. 1994;
Van de Ven 1986), thereby enhancing its ability to innovate (Powell et al. 1996) and
attract other trustworthy prospective partners (Gulati 19953).

Network Density. In addition to centrality, density inﬂuences an organization’s
ability to access and control information. Coleman (1988) argues networks that are
densely embedded with many connections between organizations allow for robust and
collective action, convey norms of exchange, and facilitate the accrual of obligations. In
high density networks, information and resources spread quickly and efﬁciently because
of the many interconnections and shared routines for information collection and
distribution amongst the network’s members (Coleman 1990; Rowley 1997; Valente
1995). As shown in Figure 4, in a dense vertical network, information can be Shared

between the Tier 1 suppliers and Tier 2 suppliers without having to involve the buyer. In

24

contrast, in a low density vertical network, information is not shared between the Tier 1
and Tier 2 suppliers and must ﬂow through the buyer. Norms between the exchange
partners form patterns of exchange and produce shared behavioral expectations and
develop a perception of legitimacy (Galaskiewicz and Wasserman 1989). Dense
networks enhance the ability to monitor actions of other ﬁrms, coordinate pressure to
conform to expectations of other network members, and apply effective sanctions since
they amplify the reputation effects of sanctions (Coleman 1990).

Safeguarding Problem in a Network Context. The safeguarding problem arises,
according to transaction cost economics, due to the deployment of nontrivial speciﬁc
assets and the possibility that a partner may act opportunistically to exploit those
investments (Williamson 1985; 1975). Transaction cost economics proposes that
increases in asset speciﬁcity lead to increases in the costs to safeguard these assets, and
when these costs exceed the cost of purchasing the product in the market, organizations
should vertically integrate to safeguard these assets against opportunism hazards
(Williamson 1985; 1975). In addition to using vertical integration to govern the
exchange, research has shown that relational governance can serve to safeguard
transaction speciﬁc assets from opportunism in interorganizational relationships where
vertical integration may not be possible (Dyer 1997; Heide and John 1992; Heide and
John 1988; John 1984). In a vertical network, the history of transactions between ﬁrms
leads to the emergence of shared values (U zzi 1997) and trust between the organizations
increases with greater interaction (Gulati 1995a). As shared values and trust between
exchange partners develop, network governance can serve in place of vertical integration

(Cannon et al. 2000).

25

Centrality of the organization and the density of the network reduce opportunism
in network governance (Coleman 1988; Granovetter 1985). A ﬁrm occupying a central
location within a network is less likely to act opportunistically due to detrimental effects
to its reputation (Raub and Weesie 1990) and is more likely to detect opportunistic
behavior due to greater access to information (Walker et al. 1997). Reputational
concerns create self-enforcing safeguards and can substitute for contractual safeguards
(Bradach and Eccles 1989; Powell 1990), where immediate short-term gains to an
organization are offset by loss of reputation and future costs (Williamson 1991). A
ﬁrm’s reputation signals to other organizations its attractiveness as a potential supplier
and its indirect ties serve as a system of referral to screen potential suppliers through
other network members with past relationships with the potential supplier (Gimeno 2004;
Gulati 1999). A centrally positioned ﬁrm can also inﬂuence the behavior of other ﬁrms
within the network due to greater dependence of these organizations on the central ﬁrm in
the network. In a study of Toyota’s supplier network, Dyer and Nobeoka (2000) found
that Toyota is able to inﬂuence its suppliers by building strong network identity and
coordinating rules. Toyota not only enhances its reputation by managing the network,
but also enhances the reputation of the other members in the network.

In dense networks where network members are interconnected, information about
one member’s opportunistic behavior diﬁuses rapidly through the network to other
members (Granovetter 1985). Dense networks facilitate the emergence of norms (Adler
and Kwon 2002) and common behavioral patterns (Coleman 1990). Violations of shared
norms are more likely to be detected and sanctions for opportunistic behavior are more

easily imposed in dense networks (Walker et al. 1997). Dense networks not only reduce

26

 

the risk of opportunistic behavior in the focal relationship, due to the threat of reputation
loss, but also in relationships with other organizations (Gulati 1995a). In dense networks,
common norms develop and improve mutual understanding among the members,
lowering the possibility of opportunistic behavior and is key to safeguarding speciﬁc
assets and substitutes for contractual safeguards (Bradach and Eccles 1989; Jones et al.
1997 ; Kale et a1. 2000).

By reducing the likelihood of opportunistic behavior, centrality and network
density lower the cost of transaction governance. Occupying a central location allows a
ﬁrm to access more information efﬁciently and accords the ﬁrm a high status and
reputation (Podolny 1993; Williamson 1991). Acts of opportunism in a dense network
are transmitted quickly through the network, which diminishes the reputation of centrally
located ﬁrms. The combination of the potential cost of tarnishing the ﬁrm’s reputation
and lower cost of obtaining information lower the cost of governance. In network
governance, the lower governance cost supports a greater investment in transaction
speciﬁc assets before the optimal cost of governance would require hierarchical
governance (Williamson 1991).

Adaptation Problem in a Network Context. Transaction cost economics states that
an adaptation problem is created when an organization’s managers, due to bounded
rationality, have difﬁculty in modifying contractual agreements when changes in the
external environment occur (Williamson 1985; 1975). The adaptation problem is further
complicated in the presence of nontrivial transaction speciﬁc asset investments by
exchange partners. According to transaction cost economic logic, the solution in

conditions of high environmental uncertainty is to vertically integrate to minimize the

27

transaction costs of adapting to the changes in the environment surrounding the exchange
(Williamson 1985; 1975). Research has shown that relational governance can also serve
to reduce environmental uncertainty and lower the transaction cost of adapting in buyer-
supplier relationships (N oordewier et al. 1990). The ability to access information through
a network reduces the environmental uncertainty facing the organization and decreases
the cost of governing the relationship by decreasing the need to implement hierarchical
governance (Gulati 1999).

The same attributes of centrality, access to information, inﬂuence, and reputation,
in a network that limit opportunism, also inﬂuence the environmental uncertainty facing
an organization. In a study examining the effect of unanticipated events on
organizations, Madhavan, Koka, and Prescott (1998) found that centrality was a
signiﬁcant factor in ascertaining the uncertainty concerning the event, suggesting that
occupying a central position in the network provides greater access to information. The
status of occupying a central location signals to other organizations the ﬁrm’s reputation
as a potential partner (Podolny 1993). In the selection of partners for alliances, referrals
and reputation provide self-selection criteria to limit potential partners for centrally
located ﬁrms (Gulati 1995b). Having knowledge of prior relationships of a potential
supplier’s behavior with other ﬁrms reduces the uncertainty in forming a relationship
with the ﬁrm, lowers search costs, and monitoring costs (Kogut et al. 1992; Powell et al.
1996)

A dense network reduces the cost to discover information and lowers search costs
(Coleman 1988). Dense networks with many linkages between organizations reduce

uncertainty and promote adaptation by increasing communication and information

28

sharing (Kraatz 1998). Organizations in dense networks have access to greater amounts
of information than in sparse networks, due to greater interconnectedness between
members of the network (Coleman 1988). Networks provide ﬁrms with ﬂexibility to
manage volatile environments and quickly adapt to changing market conditions by
changing links between members in the network (Gulati 1999). Conversely, in sparse
networks, information may be clustered in groups, each with divergent information, or
the network may lack information, thereby increasing the environmental uncertainty of an
organization.

Firms reduce their environmental uncertainty by being centrally located within a
dense network. By being centrally located, ﬁrms have greater access to information and
screen potential partners through referral from other partners and self-selection of
perspective partners. Using a dense network, organizations can gather information
efﬁciently by using the network to reduce environmental uncertainty. Reducing
environmental uncertainty in the transaction, reduces the cost of governance in hybrid
interorganizational exchanges, and lower cost of governance increases the investment in
transaction speciﬁc assets the exchange can support before the optimal cost of

governance would require hierarchical governance (Williamson 1991).

Summary

Transaction cost economics has provided a wealth of information concerning our
understanding of the attributes of a transaction that lead to the interorganizational
governance structure (David and Han 2004; Geyskens et al. 2006; Rindﬂeisch and Heide
1997 ; Shelanski and Klein 1995). However, a majority of the research has concentrated

on the dyadic relationship as the unit of analysis neglecting factors inﬂuencing the focal

29

dyad based on where it resides within a network context. Researchers in marketing have
begun to examine the inﬂuence of network factors on dyadic exchanges (Anderson et al.
1994; Antia and Frazier 2001; Gadde and Mattsson 1987; Iacobucci and Hopkins 1992;
Wathne and Heide 2004), and research has shown that including network factors
enhances the understanding of mechanisms inﬂuencing the outcomes of dyadic
relationships. A source of environmental uncertainty in an interorganizational exchange
is a change in the structure of the network in which the dyadic relationship resides. A
change in the network causes the governance structure to shift to a state where it is no
longer the most efﬁcient form of governance, at which point the partners will seek to
adapt the terms of the exchange to a new governance structure to curb the potential for
opportunism and reduce maladaptation cost. In Chapter 3, a model of adaptation and
safeguarding is developed based on the transaction cost economics paradigm with the
inclusion of the constructs of centrality and density from network theory to explain the

change in governance structure of a buyer-supplier interorganizational exchange.

30

CHAPTER THREE

THEORETICAL MODEL AND HYPOTHESES

This study investigates the adaptation of governance structure in buyer-seller
relationships. The adaptation problem in transaction cost economics addresses how
organizations manage ex post environmental uncertainty (Williamson 1985; 1975).
Adaptation to change is a critical issue in the study of interorganizational governance
(W illiarnson 1991). This study focuses on the governance of an exchange relationship
where the buyer and the supplier are autonomous organizations in a vertical network
(Achrol and Kotler 1999). Adaptation of the governance structure is required when an
extraneous event causes imbalance in an existing dyadic governance structure introducing
maladaption costs (Williamson 1985). A source of environmental uncertainty for the
dyadic relationship can be caused by a change in the structure of the network in which the
relationship resides. Speciﬁcally, for the purpose of this study, the event introducing
environmental uncertainty in the dyadic relationship is the addition of a new customer by
a supplier in the buyer’s supplier network. The addition of a new customer by a supplier
will necessitate that the governance structure between the buyer and the supplier adapt to
accommodate the new customer in the buyer’s supplier network. It is hypothesized that
the structural characteristics, i.e., centrality of the new customer in the industry network
and density of the buyer’s supplier network, will moderate the attributes of the exchange,
thereby leading to adaptation of the governance structure.

The addition of a new customer by a supplier to the network is analyzed from the
perspective of the buyer. Figure 5 presents the model for the adaptation of the

governance structure between the buyer and a supplier based on the buyer’s asset

31

speciﬁcity, behavioral uncertainty, demand uncertainty, and technological uncertainty. It
is hypothesized that centrality of the supplier’s new customer will be positively
associated with the buyer’s demand and behavioral uncertainty and will moderate the
relationship between buyer asset speciﬁcity and governance, and the density of the
buyer’s network moderates the relationships of buyer asset speciﬁcity, behavioral,
demand, and technological uncertainty with governance. Since the buyer’s supplier
network is a source of information, the buyer’s access to information will reduce the need
for vertical coordination. If the density of the buyer’s supplier network is high, then the
buyer can access more information from the network than from a network with a low
density, thereby reducing the uncertainty of the buyer.

The following section presents the formal hypotheses for buyer asset speciﬁcity,
behavioral uncertainty, demand uncertainty, and technological uncertainty incorporating
the effect of the centrality of the supplier’s new customer in the industry network and the
buyer’s supplier network density. To provide nomological validity and internal
consistency of the model, the transaction cost economic variables are incorporated in the

model and later tested in the experimental design.

Hypothesis Development

Buyer Asset Specificity. Transaction cost economics postulates as a buyer’s
investments in transaction speciﬁc assets increase, the buyer should increase the degree
of vertical coordination with a supplier (Williamson 1985; 1975). In a supplier network,
vertical coordination involves the Sharing of proprietary information, such as technical
speciﬁcations, marketing plans, and product development, with a supplier. Sharing this

information with an independent external party, the buyer loses a degree of control over

32

the information shared with the supplier. As the buyer’s investments with the supplier
increase, the buyer is at increasing risk of opportunistic behavior on behalf of the supplier
and greater vertical coordination is required to protect these assets for expropriation. The
information exchanged with the supplier may included the transfer of explicit as well as
tacit information between the buyer and the supplier (Stremersch et al. 2003). Tacit
information is particularly important for the buyer to protect from misuse, since it may
involve skills and experience that may form a basis of the buyer’s competitiveness
(Simonin 1999). As suppliers expand their customer base, an indirect link to the buyer
and access to information passed to the supplier is established. Having less control over
the information passed to the supplier, than if the component were vertically integrated,
the buyer faces an enhanced risk of expropriation by a supplier’s new customer of assets
and information shared with the supplier and a threat to the buyer’s competitiveness

(W illiarnson 1991).

To decrease the increased hazard of information leakage, the buyer will need to
increase the degree of vertical coordination with the supplier and incur an increase in the
cost of governing the relationship with the supplier (Williamson 1991). Direct costs to
the buyer to curtail information leakage include the implementation of new procedures
and policies with the supplier (Pilling et al. 1994), cost of renegotiating purchase
agreements, and amending conﬁdentiality agreements (Artz and Brush 2000). An
indirect cost to the buyer is loss of future sales by actions taken by the supplier’s new
customer acting on the information supplied by the buyer to the supplier (Kim et al.
2006). Information leaking to the supplier’s new customer may include strategies,

competitive benchmarking, codiﬁed knowledge, and tacit knowledge in skills and

33

routines (Oxley and Sampson 2004; Polanyi 1966). Consider the situation where the
supplier produces a highly customized component for the buyer. If the buyer is obligated
to supply critical information, such as trade secrets, to the supplier for the engineering
and production of the component, then the buyer may lose control over the information.
The supplier may be able to expropriate a portion of the buyer’s investment in servicing
the new customer. The situation is of particular importance when the speciﬁc asset
investment by the buyer is substantial.

When substantial assets are invested by the buyer, increased vertical coordination
with an individual supplier is necessitated when managing a network of suppliers. The
prevention of information leakage provided by a contract is limited ex ante (Grossman
and Hart 1986) as contingencies not accounted for arise when a supplier adds new
customers (Achrol and Gundlach 1999). To prevent potential information leakage to a
supplier’s new customer, greater coordination is required to offset ex post opportunism
when nontrivial speciﬁc assets are invested in the exchange relationship. In buyer-seller
exchange relationships, research has shown that organizations use pledges (Anderson and
Weitz 1992), joint action (Heide and John 1990), relational norms (Cannon et al. 2000;
Heide and John 1992), and vertical integration (Levy 1985; Masten 1984; Masten et al.
1991) to protect against ex post opportunism. This suggests that buyers will increase the
degree of vertical coordination as investments in transaction speciﬁc assets increase to
curtail opportunism, expropriation of these assets, and leakage of proprietary information

by the supplier.

H 1: As buyer asset speciﬁcity increases, vertical coordination with the
supplier increases.

34

Buyer Performance Ambiguity. As an independent entity, a supplier is not under
the direct control of the buyer, as would be the case if production of the component were
vertically integrated. The diminished degree of control over the supplier creates
behavioral uncertainty for the buyer. Behavioral uncertainty arises with the supplier due
to the potential of opportunistic inclinations on behalf of the supplier (Stinchombe 1985),
and combined with the buyer’s managers bounded rationality, creates a performance
evaluation problem for the buyer (Williamson 1985; 197 5). Having an alternative
customer decreases the supplier’s dependence on the buyer and increases the potential of
opportunistic behavior by the supplier (Yamagishi et al. 1988). Bounded rationality of
the buyer’s managers limits the ability of the buyer to accurately assess the supplier’s
performance, creating performance ambiguity. Performance ambiguity is the difﬁculty of
accurately measuring ex post the exchange partner’s compliance with expected output
(Williamson 1985; 1975). Ouchi (1980) argues that output-based measures be
supplemented with control mechanisms to control behavioral uncertainty when
performance ambiguity increases. To reduce performance ambiguity, the buyer must
increase the monitoring of the supplier’s performance to ensure the supplier conforms to
the contractual agreement (Andersen and Buvik 2001; Heide and John 1990).
Monitoring decreases the information asymmetry between the buyer and the supplier;
however, as monitoring the supplier becomes more time consuming transaction costs
increase for the buyer.

Managing a network of suppliers, it is particularly important for the buyer to
monitor suppliers as suppliers add new customers to ensure the obligations to buyer are

met by the supplier. The ability of monitoring to serve as a control mechanism is

35

dependent on the availability of information (Stump and Heide 1996), and performance
ambiguity increases as the product delivered by the suppliers becomes increasing
intangible and complex (Houston and Johnson 2000). For monitoring to be successful,
the object of the monitoring needs to visible to the buyer. If the buyer cannot distinguish
the performance level of the supplier, then the cost of monitoring increases. With
increasing levels of complexity, the ability of the buyer to write complete contracts
deteriorates (Grossman and Hart 1986) and performance ambiguity increases. Increased
performance ambiguity will require the buyer to pursue active mechanisms of
observation to ensure supplier compliance. Under such conditions, buyers have resorted
to greater interﬁrrn coordination (Andersen and Buvik 2001), joint venture formation
(Houston and Johnson 2000), and vertical integration (Anderson 1985; Anderson and
Schmittlein 1984) as forms of governance to reduce performance ambiguity. Increasing
monitoring efforts reduces performance ambiguity and the incentive of the supplier to act
opportunistically (Heide and John 1990). Increased monitoring of the supplier increases
the buyer’s ability to detect opportunistic behavior and decreases the incentive for the
supplier to act opportunistically. This suggests that buyers managing a network of
suppliers will increase vertical coordination with suppliers as the performance ambiguity

increases.

H2: As buyer performance ambiguity increases, vertical coordination
with the supplier increases.

Buyer Demand Uncertainty. Demand uncertainty combined with bounded
rationality creates an adaptation problem for the buyer (Williamson 1991; 1985; 1975).
The demand uncertainty facing the buyer includes not only the volatility of the buyer’s

market, but also the buyer’s share of the market. Bounded rationality limits the ability of

36

the buyer’s managers to accurately forecast market demand. In a study of automotive
manufacturing, Walker and Weber (1984) found that when demand is difficult to
accurately forecast, the likelihood of implementing mechanisms of internal control
increases. Vertical integration as a means to reduce demand uncertainty is supported in
studies by Levy (1985) and Leiblein and Miller (2003). Similarly, in distribution channel
research, the buyer’s likelihood of using direct channels (John and Weitz 1988) and
backward integration (Lieberman 1991) increases with demand uncertainty.

In a network context, the demand uncertainty in the exchange relationship facing
the buyer increases with the addition of a new customer by a supplier in the buyer’s
supplier network. The addition of a new customer reﬂects a change in the capacity of the
supplier base in the overall industry. The change in supplier base capacity, may signal
changes in the demand for the end product and reduce the ability of the buyer to forecast
future demand requirements. By adding the supplier, the new customer may be
embarking on a strategy to increase its market share, thereby increasing the volatility of
the market. Increases in demand uncertainty may cause ﬂuctuations in the buyer’s
demand, and by relying on the supplier, the buyer may experience shortages or excess
inventory. The buyer will need to negotiate an increased number of contingencies with
the supplier ex post (John and Weitz 1988), and renegotiation increases the costs of the
exchange by requiring adaptation of existing routines, procedures, and delivery schedules
(Heide and John 1990). Failure to adjust the relationship to account for the change in
demand uncertainty may result in maladaptation costs since the existing governance

structure is no longer optimal (Williamson 1991). Greater ﬂuctuations in future demand

37

will require increased vertical coordination to counter changes in demand uncertainty on

behalf of the buyer with the supplier.

H3: As buyer demand uncertainty increases, vertical coordination with
the supplier increases.

Buyer Technological Uncertainty. Technological uncertainty is the inability to
accurately forecast the technical requirements (Walker and Weber 1984). In industries
where the pace of technological innovation is frequent, investments in speciﬁc assets
having low salvage value, increase the capital loss in the event of technological
obsolescence as innovation supersedes the existing technology (Balakrishnan and
Wernerfelt 1986). In industries with high technological uncertainty, manufacturers
cannot produce all the potential innovations internally. Integrating vertically insulates
ﬁrms from the environment, making them slow to adapt to changes (Lawrence and
Lorsch 1967; Robertson and Gatignon 1998). The potential for capital losses resulting
from shifts in technology suggests that the beneﬁts of reducing transaction costs by
vertically integrating may be offset by retaining ﬂexibility to adapt to changes in
technology. In a study of alliance formation, Klein, Frazier and Roth (1990) found that
organizations preferred the use of alliances in lieu of vertical integration in volatile
technical environments.

An advantage of a network of suppliers is the buyer is freed ﬁ'om committing
investments internally and being dependent on one technology. By purchasing
components ﬁom a network of suppliers, the buyer has access to new technology offered
by other suppliers. By using an intermediate form of governance, buyers are able to react
to technological changes in a timely manner and achieve early mover advantages (Klein

et al. 1990). This decreases the likelihood that the buyer will lose its competitive

38

advantage due to technological obsolescence. This suggests that in technological volatile
environments, the buyer will desire the ﬂexibility to use new technology and minimize
agreements that tie the buyer to the supplier long-term leading to a decrease in vertical

coordination.

H4: As buyer technological uncertainty increases, vertical coordination
with the supplier decreases.

Supplier New Customer Centrality. In the relationship with the current supplier,
the performance ambiguity regarding the actions of the supplier is increased after the
supplier adds a new customer. The degree of buyer performance ambiguity is dependent
on the position the supplier’s new customer occupies in the industry network. A centrally
positioned new customer will increase the buyer performance ambiguity for the buyer
due to enhanced reputation and status (Podolny 1993) conferred upon the supplier and
decreased dependence of the supplier on the buyer (Cook et a1. 1983; Yamagishi et al.
1988). By being centrally located, an organization’s inﬂuence is elevated within the
network (Boje and Whetten 1981). A central organization’s inﬂuence stems from its
ability to control the ﬂow of valued resources and mobilize resources controlled by others
(Raub and Weesie 1990). In research of the Japanese automotive industry, Dyer (1997)
found that manufacturers exerted inﬂuence over their network of suppliers by extensive
interﬁrrn knowledge exchange, investments in specialized assets, and ﬁnancial linkages.
Being linked with a new customer of high status and reputation (Podolny 1993), derived
from its central location in the industry network, increases the status of the supplier
(Heide and John 1992). If the new customer has a reputation of high quality products, the
supplier, by virtue of supplying the new customer, increases its status within the industry

as a supplier of high quality components. The increased status, conferred on the supplier

39

by the new customer, can create a sense of obligation and reciprocity (Cook and Emerson
197 8) to the new customer at the expense of the buyer. Changes in behavior could result
in the supplier ﬁlling orders for the new customer before the buyer’s orders, assigning
greater resources to support the new customer, and decreasing responsiveness to the
buyer.

In addition, having access to the new customer reduces the dependence
of the supplier on the buyer (Cook et al. 1983; Yamagishi et al. 1988). The
addition of the new customer creates a situation where the new customer and
the buyer compete for the supplier’s resources. By Virtue of being between
each customer, the supplier is in a position of mediating both relationships by
withholding or distorting information given to each customer (Cook and
Emerson 1978; Yamagishi et al. 1988). This gives the supplier leverage in
negotiations with each customer by playing off each customer to gain favorable
terms. Having a new customer increases the potential of the supplier failing to
comply with the contract with the buyer. The enhanced reputation and status
and decrease in dependence upon the buyer, suggests that the buyer
performance ambiguity will be greater if the supplier’s new customer occupies

a central location within the industry network.

H5: As the centrality of the supplier’s new customer in the industry
network increases, buyer performance ambiguity increases.

Organizations central in an industry network have more access to information,
greater inﬂuence on other organizations (Freeman 1979; Gnyawali and Madhavan 2001),
and are more innovative (Hansen 1999) than non-central organizations. When a supplier

in a buyer’s supplier network adds a centrally positioned new customer, future buyer

40

demand uncertainty is increased due to the potential of new innovative products being
introduced to the market by the supplier’s new customer. A supplier’s new customer that
is centrally located in the industry network will have a greater number of direct linkages
and independent access to other organizations than less centrally located organizations
(Rindﬂeisch and Moorrnan 2001). With a greater number of linkages, a centrally
positioned new customer is more active in the industry network, forming multiple
partnerships with suppliers and collaborative ventures (Baker 1990; Granovetter 1985).
Direct linkages supply information that is reliable and timely from trustworthy partners
(Becker 1970). Having a greater number of linkages with other organizations, a centrally
located new customer is less likely to miss valuable information (Powell et al. 1996) and
has access to new information earlier than non-central members of the network (Freeman
1979)

Having independent access to other organizations, a centrally located new
customer can access information quickly and avoid the control of other organizations
(Burt 1992b). Independent access provides the new customer with access to unique and
novel information within the industry network (Ahuja 2000; Shan et al. 1994; Valente
1995; Van de Ven 1986). Having multiple information sources, provides multiple
avenues for information, which allows a centrally positioned new customer to combine
information from diverse sources to generate innovation (Powell et al. 1996). Research
in the biotechnology industry found that central organizations had a greater number of
collaborative ventures and grew at a greater rate than non-central organizations (Akerlof

1970). Greater independent access to information suggests a supplier’s new customer

41

that is centrally located within an industry network will have an enhanced ability to
innovate and introduce new products to the market.

With a greater potential to introduce new products to the market than non-central
organizations, a centrally located new customer increases buyer demand uncertainty. The
buyer will be unsure of the reasons for the new customer establishing a relationship with
the supplier. By working with the supplier, the new customer may be signaling a change
in its marketing strategy. The new customer may potentially be embarking on a
campaign to increase its market share, leading to a potential decrease in the buyer’s
market share. On the other hand, the new customer may be switching suppliers to correct
a quality problem with an existing supplier, suggesting a potential increase in market
share for the buyer. In either case, the addition by the supplier of centrally positioned
new customer diminishes the ability of the buyer to accurately forecast future demand

greater than if the supplier’s new customer is non-central in the industry network.

H6: As the centrality of the supplier’s new customer in the industry
network increases, buyer demand uncertainty increases.

Supplier New Customer Centrality (Moderator). The addition of a new customer
by the supplier creates competition for the supplier’s resources between the new customer
and the buyer (Cook and Emerson 1978; Yamagishi et a1. 1988). The supplier is in a
position to decide which resources to allot in supporting either the new customer or
buyer. A centrally located new customer has an enhanced reputation and status within
the industry network (Podolny 1993; Raub and Weesie 1990). To enhance its own status,
the supplier may be inclined to increase collaboration with the new customer at the
expense of the buyer (Burt 1992a). Sensing a change in commitment, the buyer may

perceive a heightened potential of opportunistic behavior by the supplier. In addition, a

42

centrally located new customer has greater access to information and resources (Valente
1995) and is more innovative (Hansen 1999). Being able to access information through a
network of organizations, a centrally positioned new customer will have developed
mature routines and procedures for acquiring and disseminating information (Podolny
1994; Podolny 1993). The mature information processing routines of a central new
customer suggests that it will be able to acquire a greater amount of information about the
buyer through the supplier than a non-central new customer.

The addition of a centrally positioned new customer by the supplier increases the
cost of safeguarding the transaction speciﬁc assets invested with the supplier. If the new
customer is centrally positioned with mature routines for gathering information, then the
threat of information passing to the new customer is heightened. To safeguard the assets
invested with the supplier, the buyer has three options. First, the buyer may select market
governance by bidding the contract to other suppliers capable of making the component.
Second, the buyer may choose to continue purchasing from the current supplier and
increase the level of vertical coordination with the supplier. Third, the buyer may select
to vertically integrate the production of component. Williamson (1985; 1975) postulates
that as transaction speciﬁc assets increase the cost of safeguarding these assets increases
and the buyer would vertically integrate the production of the component. However,
when a buyer has outsourced the production of components to a network of suppliers and
views the network as an extension of the buyer’s organization, vertical integration is less
likely to be the ﬁrst option considered when substantial assets have been invested with
the supplier. By vertically integrating, the buyer must absorb the entire cost of producing

the component, whereas switching suppliers allows the buyer to transfer the cost of

43

producing the component to a new supplier and reduces the cost of safeguarding the
assets than if the buyer had remained with the current supplier. This suggests that buyers
will switch suppliers to protect against the loss of information and expropriation of assets
than continue purchasing from the current supplier when the new customer is central to

the industry network.

H731: Under high centrality of supplier’s new customer in the industry
network, buyer asset speciﬁcity (high/low) leads to a governance
choice of market governance.

Alternatively, a new customer that is not central to the industry network is
perceived as less of a threat to the buyer’s competitive position. Non-central
customers are less likely to have well developed procedures and routines for
gathering and disseminating information as compared to central organizations.
Thus, it is less likely that non-central customers will be able to gather information
from the supplier and use the information to diminish the buyer’s competitive
position in the industry. Since the non-central new customer is less of threat to
the buyer, the cost of implementing safeguarding procedures with the current
customer are less than switching to a new supplier and incurring the cost of
qualifying a new supplier, or vertically integrating the production of the
component. Thus, when a non-central new customer is added by the current

supplier, the buyer is more likely to choose to continue purchasing from the

current supplier.

H7212: Under low centrality of supplier’s new customer in the industry
network, buyer asset speciﬁcity (high/low) leads to a governance
choice of vertical coordination with the current supplier.

44

If the buyer chooses to continue purchasing from the current supplier after the
addition of the new customer, then transaction cost economics would recommend the
buyer increase the level of vertical coordination with the supplier to safeguard the assets
invested. Centrally positioned new customers present a greater threat to the buyer due to
enhanced information gathering and dissemination routines (Podolny 1994; Podolny
1993). Safeguarding against the increased potential of opportunistic behavior by the
supplier and information leaking to the new customer, increases the likelihood that the
buyer will implement greater forms of vertical coordination (Heide and John 1992; Kale

et al. 2000).

H7b: As the centrality of the supplier’s new customer in the industry

network increases, the relationship between buyer asset speciﬁcity
and vertical coordination with the supplier increases.

Buyer Supplier Network Density. Density measures the relative number of ties in
the network that link organizations together (Galaskiewicz and Wasserman 1989; Walker
et al. 1997). Dense buyer-supplier networks facilitate efﬁcient communication and
development of shared behavioral expectations amongst members (Coleman 1990;
Valente 1995), and can provide information to offset the increased uncertainty due to the
addition of a new customer by the supplier. In sparse buyer supplier networks, the
amount of information and shared behavioral expectations are lessened. The buyer can
reduce the uncertainty with the current supplier by adjusting the governance with the
supplier, and the buyer may choose to purchase the component from another supplier by
choosing market governance when its supplier network is sparse. In sparse buyer

supplier networks, the lack of information availability lessens the buyer’s ability to detect

opportunistic behavior, and the buyer can reduce the potential of opportunistic behavior

45

of the current supplier concerning transaction speciﬁc assets by switching to another
supplier. This suggests that in sparse buyer supplier networks, the propensity of the
buyer to opt for market governance will increase after the addition of a new customer by

a supplier.

H3 a1: Under low buyer supplier network density, buyer asset Speciﬁcity
(high/low) leads to a governance choice of market governance.

Alternatively, in dense buyer supplier networks, shared behavioral
expectations and information ﬂowing through the network reduce the prospect of
the supplier engaging in opportunistic behavior. Information obtained through a
dense network comes at a minimal cost to the buyer, limiting the need of buyer to
invest in monitoring of the supplier directly. The ability to access this
information lowers the cost of continuing to purchase from the current supplier
and diminishes the need to switch suppliers or vertically integrate the production

of the component.

H332: Under high buyer supplier network density, buyer asset speciﬁcity
(high/low) leads to a governance choice of vertical coordination
with the current supplier.

The combination of efﬁcient communication of shared behavioral expectations in
dense buyer supplier networks serves to provide the buyer with a mechanism to curtail
opportunistic behavior. Since dense networks are efﬁcient means of communicating,
information about supplier opportunistic behavior diffuses rapidly through the network to
the buyer (Williamson 1991), and the buyer can coordinate pressure on the supplier to
conform to expectations (Burt 2000; Coleman 1988; Granovetter 1985) through the use

of a coalition of other network members (Coleman 1988; Rowley et al. 2000; Walker et

al. 1997). Sanctions carry the threat of reputation loss (Powell and Smith-Doerr 1994),

46

limiting the future prospect of supplying other organizations within the network. The
density of the buyer’s supplier network allows the buyer to monitor the actions of the
supplier and the new customer efﬁciently and at a cost less than having to integrate the
activity performed by the supplier to protect its investment in speciﬁc assets and prevent
leakage of information to the supplier’s new customer. Since a dense buyer supplier
network decreases the cost of monitoring for the buyer, it is expected that the buyer’s

preference for vertical coordination with the supplier will be decreased.

Hgb: As buyer supplier network density decreases, the relationship

between buyer asset speciﬁcity and vertical coordination with the
supplier increases.

Dense buyer supplier networks also facilitate the diffusion of norms within the
network, serving as a constraint on the supplier’s behavior. Firms in the same network
imitate one another’s behavior in an attempt to be perceived as legitimate (Galaskiewicz
and Wasserman 1989; Walker et al. 1997), and behaviors within the network become
similar as shared behavioral expectations are established (Rowley 1997). In sparse buyer
supplier networks norms are not well developed. Thus, behavioral expectations are lower
and buyer performance ambiguity is increased. When a supplier adds a new customer in
a sparse buyer supplier network, the difﬁculty of monitoring the supplier increases and
the supplier conforming to expected behavior is diminished. This suggests that buyers

will opt for market governance in sparse buyer supplier networks to offset the increased

performance ambiguity after the supplier adds a new customer.

H931: Under low buyer supplier network density, buyer performance
ambiguity (high/low) leads to a governance choice of market
governance.

47

Alternatively, in dense buyer supplier networks, the diffusion of norms
serving as a constraint on the supplier’s behavior decreases buyer performance
ambiguity. Well developed norms within the buyer supplier network decrease
buyer performance ambiguity due to conforming to expectations of behavior
established within the network (Heide and John 1992). Failure to adhere to
network norms may lead to diminished future opportunities ﬁ'om the buyer and
other members of the network. In dense networks, the cost of monitoring a
supplier is reduced and the buyer is more likely to continue purchasing from the
current supplier instead of switching supplier or producing the component

internally.

H9212: Under high buyer supplier network density, buyer performance
ambiguity (high/low) leads to a governance choice of vertical
coordination with the current supplier.

In a dense buyer supplier network, information on deviant behavior quickly
disseminates to other network members and is sanctioned by other members of the
network (Powell and Smith-Doerr 1994). The predictability of behavior in dense
networks constrains the behavior of the supplier and promotes cooperation with the
buyer. When the density of the buyer supplier network is low, the interconnectivity
between suppliers is reduced and developing norms regarding cooperation are difﬁcult to
develop and information regarding the supplier’s behavior travels more slowly through
the network. Raub and Weesie (1990) demonstrate, using a Prisoner’s Dilemma
ﬁ'amework, that organizations in a dense network are constrained from deviant behavior

and are more cooperative than organizations in networks where the density is low.

Without access to information and the ability to sanction the supplier, the buyer must

48

resort to monitoring the supplier directly. Having access to information and the ability to
sanction deviant behavior in a dense supplier network, suggests the buyer’s costs to
monitor the supplier are reduced and the need to increase vertical coordination is
diminished.

Hgb: As buyer supplier network density decreases, the relationship

between buyer performance ambiguity and vertical coordination
with the supplier increases.

The density of a buyer’s supplier network serves as a source of information to
reduce uncertainty, both demand and technological, when a supplier adds a new
customer. The availability of information is dependent on the density of the buyer
supplier network (Coleman 1990; Valente 1995). In dense buyer supplier networks,
information is quickly disseminated throughout the buyer’s supplier network. By
gathering information from a dense network of suppliers, the buyer can reduce the cost of
governing the relationship with the supplier adding the new customer. In contrast, a
sparse buyer supplier network fails to provide information necessary to reduce the
governance cost of the managing the relationship with the supplier adding the new
customer. If a buyer has a sparse network of suppliers, the cost of reducing uncertainty
can be lower by opting for market governance and switching to a new supplier where the
uncertainty in the new relationship is lower than with the current supplier. This suggests
that in sparse buyer supplier networks, the lack of information availability will increase

the buyer’s preference for market governance and the buyer will switch to a new supplier

to decrease demand and technological uncertainty when a supplier adds a new customer.

H1031: Under low buyer supplier network density, buyer demand
uncertainty (high/low) leads to a governance choice of market
governance.

49

H11a1: Under low buyer supplier network density, buyer technological
uncertainty (high/low) leads to a governance choice of market
governance.

Alternatively, in dense buyer supplier networks, information is available
ﬁom suppliers within the buyer’s supplier network. By accessing this
information, a buyer may reduce demand and technological uncertainty created
when a supplier adds a new customer. The cost to access this information is
minimal to the buyer and reduces the cost of managing the relationship with the
current supplier. Having reduced demand uncertainty, the buyer will not need to
coordinate changes in production as often. In addition, by accessing information
through the network, the buyer will be aware of pending technological changes
and can adjust its product offering to account for the changes in technology. This

suggests that when buyers have dense supplier networks, they will be less likely

to switch suppliers or vertically integrate the production of the component.

H1032: Under high buyer supplier network density, buyer demand
uncertainty (hi gh/low) leads to a governance choice of vertical
coordination with the current supplier.

H1132: Under high buyer supplier network density, buyer technological
uncertainty (high/low) leads to a governance choice of vertical
coordination with the current supplier.

If the buyer chooses to continue working with a supplier after the supplier adds a
new customer, the density of the buyer’s supplier network inﬂuences the level of vertical
coordination. As a source of information, the network the can reduce buyer demand
uncertainty in its relationship with the supplier. Information supplied by the network is

inexpensive, relative to formal governance mechanisms, and is from organizations that

the buyer has worked with in the past. Information gathered ﬁ'om these close associates

50

tends to be more reliable and detailed (Granovetter 1985). Research supports the notion
that organizations use networks to assess threats and opportunities within the market
(Rowley et al. 2000; Walker et al. 1997). In the case of demand uncertainty, the buyer
can determine ﬁ'om its network of suppliers if the new customer is adding capacity to
embark on a market expansion campaign, thus threatening the buyer’s future market
share. On the other hand, the supplier’s new customer may be adding the buyer’s current
supplier to address a quality issue with its supplier and the buyer may be able to
capitalize on the opportunity to increase its market Share. However, in sparse buyer
supplier networks, information regarding the inclinations of the new customer is
diminished. This suggests when buyers have a sparse network of suppliers, buyers will
need to increase the level of vertical coordination with the supplier adding the new

customer to offset demand uncertainty.

H101): As buyer supplier network density decreases, the relationship

between buyer demand uncertainty and vertical coordination with
the supplier increases.

Technological uncertainty reduces the ability of the buyer to accurately forecast
technical requirements (Walker and Weber 1984). A dense network of suppliers reduces
the degree of technological uncertainty confronting the buyer by providing information
on technical advances (Valente 1995). The buyer can use this information from its
supplier network to determine if the new customer is offering new technology and
threatening the buyer’s technology. Conversely, if the buyer supplier network density is
low, the ﬂow of information through the network is diminished and the buyer is at a

greater threat of technological obsolescence. In sparse buyer supplier networks, the

buyer will need to invest in a greater level of vertical coordination directly with the

51

supplier to reduce technological uncertainty. On the other hand, having access to a dense
network of suppliers, the buyer can gather timely and reliable information without

instituting increased levels of governance with the current supplier. It is expected that if
the buyer has a dense network of suppliers, the buyer’s preference for increasing vertical

coordination with the supplier will be diminished.

H1 1b: As buyer supplier network density decreases, the relationship
between buyer technological uncertainty and vertical coordination
with the supplier increases.

52

CHAPTER FOUR

RESEARCH METHOD

The research hypotheses presented in the preceding chapter are empirically tested
by examining decisions of supply chain management professionals to adapt existing
supplier relationships to accommodate the addition of a new customer by a current
supplier in their supplier network. The research of adaptation of supplier relationships
poses signiﬁcant challenges in isolating the phenomenon. Relationships with suppliers
typically incorporate a time horizon making immediate adaptation of the relationship
difﬁcult. Retrospective surveys require the informant to construct responses for two
incidences in time: the time of the addition of the supplier’s new customer and the
response at a later date when the purchase agreement is amended. The difference in time
between the events introduces confounding factors, limiting the validity of the results
(Cook and Campbell 1979). To isolate the factors inﬂuencing the decision making
process, an experimental scenario design is utilized (e.g., Achrol and Gundlach 1999;
Dutta and John 1995; Joshi and Arnold 1997; Pilling et al. 1994).

The research for this dissertation is conducted in two phases. In the ﬁrst phase, a
qualitative analysis, literature review, and pre-test are conducted to gain a deeper
understanding of the phenomenon. In the qualitative analysis adaptive responses are
investigated by interviewing supply chain management professionals and performing a
literature review to develop the experimental scenarios. This is followed by the pre-test
of potential items to be used in the second phase of the research. The second phase uses
role-playing scenarios in seven 2 x 2 mixed design experiments. The transaction cost

economic variables (buyer asset specify, buyer performance ambiguity, buyer demand

53

uncertainty, and buyer technological uncertainty) are tested with between group
treatments and the network variables (centrality and density) are tested with within group

treatments.

Validation of Variable Measures and Pre-test

Validation of the variable measures and experimental scenarios to be used in this
research necessitate a pre-test strategy to specify the domain, purify measures, and
establish external validity of the experimental design. The pre-test portion of this
research investigates the adaptive responses taken by supply chain management
professionals and the validation of the experimental scenarios to be used in the study.

The research follows an iterative process to increase the understanding of how the
conceptual elements are perceived in industry and how scenarios developed are
understood by professionals. The development of the variable measures and
experimental scenarios uses a three—step process. The ﬁrst step focuses on collecting
adaptive responses from supply chain management professionals when confronted with
the unanticipated addition of a new customer by a supplier. Second, a literature review to
compile a list of adaptive responses and potential items for the constructs tested in the
experimental design is undertaken. Finally, a pre-test is conducted with supply chain
management professionals for each of the items to be used in the experiments. After each
step in the process, wording of items and scenarios are altered as needed.

The ﬁrst step entails collecting responses of adaptive behavior taken by supply
chain management professionals upon learning of a supplier selling to a new customer
using an open-ended question format. The event of learning of a supplier selling to a new

customer is conceptualized as an unanticipated event that is new information to the

54

manager (Williamson 1991). A clinical professor of purchasing management assisted in
the development of a sampling frame. Forty six supply chain management professionals
were contacted by e-mail requesting their participation (Appendix 1) with an outline of
the research (Appendix 2). A second e-mail was sent requesting their participation
(Appendix 3). After two weeks, a third e-mail was sent as a reminder to non-respondents
(Appendix 4). Twenty seven professionals agreed to participant, resulting in a 59%
response rate.

The twenty seven supply chain professionals were interviewed over the phone
using an open-ended question format (Appendix 5) to understand their reaction to
supplier adding a new customer. Questions focused on how the subjects would structure
relationships with suppliers concerning asset speciﬁcity, performance ambiguity, demand
uncertainty, and technological uncertainty and how centrality of the supplier’s new
customer and the density of their supply network would inﬂuence their response
concerning the supplier adding the new customer. These professionals stressed the need
to reduce uncertainty regarding the relationship with the supplier and avoid any potential
adverse effects regarding delivery performance, supplier production capacity, diversion
of dedicated resources, and leakage of propriety information. Furthermore, if the
supplier’s new customer occupied a central position in the industry, then uncertainty of
the relationship with the supplier increased. Professionals with greater experience in
supply chain management stressed that the density of their supplier network factored into
the decision making process of governing the relationship with individual suppliers.

Dense networks served as a source of informal information that reduced the need for an

55

increase in vertical coordination with an individual supplier and reduced the likelihood of
switching to a new supplier in the event of a customer being added.

The second step consists of conducting a review of the extant literature for
measurement scales for vertical coordination and the independent variables. The results
of the literature review are presented in Appendix 6. The literature review determined
the construct deﬁnition (measure) and the items used to measure the construct in previous
research. Vertical coordination has been deﬁned as the extent parties carry out focal
activities in a cooperative and coordinated way (Andersen and Buvik 2001; Buvik 2000),
interﬁrrn ﬂows of activities, resources, and information in order to coordinate productive
values and deal with the realignment of terms of trade (Buvik and Andersen 2002; Buvik
and Gronhaug 2000), the regular pattern of similar or complementary actions and
activities (J ap 2001), and the purposive organization of the ﬂow of activities and
information between the transacting parties (Buvik and John 2000). These deﬁnitions of
vertical coordination focus on the need for transacting parties to engage in purposive and
coordinated action in the exchange of information in pursuit of economic gain. Items
used to measure vertical coordination include cooperation with the supplier in quality
assurance (Andersen and Buvik 2001; Buvik 2000; Buvik and Andersen 2002; Buvik and
Gronhaug 2000; Buvik and John 2000), resolution of conﬂicts (Buvik and Gronhaug
2000), price development and market conditions (Buvik and Gronhaug 2000; Buvik and
John 2000), new product development (Andersen and Buvik 2001; Buvik and Andersen
2002; Buvik and Gronhaug 2000), production capacity (Andersen and Buvik 2001; Buvik

and Andersen 2002), and goal setting and forecasting (Artz and Brush 2000).

56

Research focusing on transaction speciﬁc assets has deﬁned transaction speciﬁc
assets as investments made by the OEM/buyer with a particular supplier (Bensaou and
Anderson 1999; Buvik 2000; Buvik and Andersen 2002; Buvik and Reve 2001; Heide
2003; Heide and John 1990; Heide and John 1992; Heide and Stump 1995; Rokkan et al.
2003; Stump 1995; Stump and Heide 1996) and assets invested in export channels (Klein
1989; Skarmeas et al. 2002). Deﬁnitions of transaction speciﬁc assets stress the
idiosyncratic nature of the assets with a particular supplier and the loss of value if these
assets are transferred to other uses. Items measuring transaction speciﬁc assets account
for investments in tooling and equipment (Artz and Brush 2000; Buvik 2000; Buvik and
Andersen 2002; Buvik and Reve 2001; Heide 2003; Heide and John 1990; Heide and
John 1992; Heide and Stump 1995; Rokkan et al. 2003; Stump 1995; Stump and Heide
1996), tailoring of the buyer’s production system (Buvik and John 2000; Heide 2003; Jap
2001), training of personnel (Rokkan et al. 2003; Skarmeas et al. 2002), and adaptation of
technological standards (Buvik 2000; Buvik and Andersen 2002; Buvik and Reve 2001;
Heide and John 1990; Heide and John 1992; Joshi and Stump 1999). These items address
the spectrum of asset speciﬁcity to include site speciﬁcity, physical asset speciﬁcity,
human asset speciﬁcity, and dedicated assets (Williamson 1985) with a particular
supplier in an exchange relationship.

Previous research regarding performance ambiguity on part of the buyer has been
adapted to the context of the research. For instance, in buyer-supplier relationships,
performance ambiguity has been deﬁned as the predictability/difﬁculty of the buyer in
evaluating behavior/performance of the supplier (Heide and John 1990; Heide and Miner

1992; Heide and Stump 1995; Joshi and Stump 1999; Stump and Heide 1996). In a

57

franchisor/franchisee context, Antia and Frazier (2001) deﬁne performance ambiguity as
the “extent of information available regarding agent performance,” and in a
manufacturer/distributor context, performance ambiguity is deﬁned as the “ex ante
difﬁculty faced by the manufacturer in evaluating the speciﬁc geographic area covered by
the distributor” (Bergen et al. 1998). Items used to measure performance ambiguity in
buyer-supplier relationships include ability to predict prices from the supplier (Heide and
John 1990; Heide and Miner 1992; Joshi and Stump 1999), ability to predict delivery
performance (Heide and Stump 1995; Joshi and Stump 1999), ability of supplier to adapt
to changes in order speciﬁcations (Heide and Stump 1995; Joshi and Stump 1999), and
monitoring of supplier (Heide and John 1990; Heide and Miner 1992).

Prior research has separated environmental uncertainty into demand uncertainty
and technological uncertainty. Demand uncertainty has been deﬁned as changing market
conditions (Andersen and Buvik 2001; Buvik and Gronhaug 2000), price and volume
uncertainty (Artz and Brush 2000), and inability to forecast volume requirements
(Bensaou and Anderson 1999; Heide and John 1990; Heide and Stump 1995; Robertson
and Gatignon 1998). Items used to measure demand uncertainty include demand for end
product varies continually (Andersen and Buvik 2001; Artz and Brush 2000; Buvik and
Gronhaug 2000; Buvik and John 2000), volume requirements for this component are
predictable/reliable (Bensaou and Anderson 1999), demand is difﬁcult to forecast
(Robertson and Gatignon 1998), and predictability of industry sales volume for end
product (Ganesan 1994; Heide and John 1990; Heide and Stump 1995). These items

capture both the inability to predict the future demand for the end product and the

58

inability to provide the supplier with accurate volume predictions needed for production
scheduling.

Technological uncertainty has been deﬁned in prior research as technological
dynamism (Andersen and Buvik 2001; Buvik and Gronhaug 2000), likelihood of major
changes in a component, performance, and manufacturing processes (Bensaou and
Anderson 1999), extent of technical innovation and rate of change of technology (Celly et
al. 1999), inability to predict accurately technological changes in product and/or process
technology (Robertson and Gatignon 1998; Stump 1995; Stump and Heide 1996), and
inability to forecast accurately the technological requirements in a relationship (Heide
and John 1990). Items used to measure technological uncertainty include product
purchased has high innovation rates and short life cycles (Andersen and Buvik 2001;
Buvik and Gronhaug 2000; Buvik and John 2000; Robertson and Gatignon 1998),
predictability of technological changes in the end product (Stump and Heide 1996), and
changes in product speciﬁcations (Heide and John 1990; Stump 1995; Walker and Weber
1984). These deﬁnitions and items conceptualize technological uncertainty as external to
the focal buyer-supplier relationship that inﬂuence the predictability of technical changes
to the end product or components purchased and the inability to forecast technical
speciﬁcations for the supplier on behalf of the buyer.

Empirical research regarding the network variables centrality and density in
supply chain literature is limited to research conduced by Antia and Frazier (2001).
Centrality is deﬁned as the strength of an individual agent’s position in an agent network.
Items to measure the agent’s position are crucial cog in the franchisee network, maintain

few relations in other franchisees, activity in franchise network, number of links with

59

other franchisees, and centrality in franchise system. Density is deﬁned as the average
strength of relations in a network. Items to measure the density of a network are
franchisees share close ties amongst themselves, degree of interaction among franchisees,
closeness of relations among franchisees, degree of communication and discussion of
common problems among franchisees, and cohesiveness.

This research investigates the adaptation of governance in an existing buyer-
supplier dyad when an unanticipated event occurs, speciﬁcally when the supplier adds a
new customer. As the scales in the extant literature were meant for different contexts, the
scales are adapted to the context and focus of this study where necessary, based on the
responses of the supply chain management professionals interviewed in step one and
input from academic experts familiar with transaction cost economics and network
theory.

In the third step, a pre-test of the items used in each of the scenarios is conducted
with eighteen professionals. The questionnaire e-mailed to each professional is presented
in Appendix 7. In the pre-test, each of the items is tested individually for its effect on
vertical coordination. Consistent with transaction cost economics, the high treatments for
buyer asset speciﬁcity, performance ambiguity, demand uncertainty, and technological
uncertainty led to increased vertical coordination with the supplier (p < .001). Testing of
the control variables showed that market position had no effect on vertical coordination;
however, having a single supplier (p < .001), few qualiﬁed suppliers in the market (p <
.001), and purchasing frequency (p < .01) led to increased vertical coordination with the
supplier. The results for the transaction cost and control variables are presented in Table

4. The results for buyer supplier network density and supplier new customer centrality

60

are presented in Table 5 and were not signiﬁcantly different between the high and low
treatments. However, all four treatments were signiﬁcantly different than zero, indicating
that the subjects were adapting the governance and increasing the degree of vertical
coordination with the supplier due to the addition of the new customer.

After completing the survey, each participant was interviewed to assess how well
each item was comprehended and measured the intended construct. Analysis of the
results revealed that the manipulations were directionally correct and were well
understood by the participants. Suggestions for improvement of the wording were

incorporated in to the scenarios used in the seven role-playing experiments.

Experiment Method and Design

Sampling Frame. A key informant methodology is used to generate the data for
this research. The sampling ﬁ'ame chosen for this research requires knowledgeable
professionals as key informants (Campbell 1955; John and Reve 1982). Subjects for this
research required supply chain management professionals that possess unique knowledge
required in the adaptation of purchasing agreements and management of supplier
relationships. Supply chain management professionals have responsibility for
developing, negotiating, managing, and monitoring supplier contract performance

(Cannon et al. 2000). The sampling frame consists of supply chain professionals who are

members of the Institute for Supply Management (ISM)3. A subset of 4630 ISM supply

chain management professionals from Standard Industry Codes (SIC) 350, 360, 370, and

 

3 Formerly known as the National Association of Purchasing Management

61

3804 were randomly selected. Members supplying a home address were removed and
only professionals supplying a work address in the US. were included in the sample. A
ﬁnal sample of 2681 resulted. Phone numbers for the sample were obtained from
whitepages.com and Verizon information.

Response Rate. For the seven role-playing experiments 867 supply chain
management professionals were contacted, 504 agreed to participate and 363 either
declined to participate (123), no longer worked for the ﬁrm (178), or the phone number
was unavailable for the ﬁrm (62), leading to a response rate of 58%. Of the supply chain
management professionals that agreed to participate, 336 are male and 168 are female,
and 257 of the respondents are managers and 247 are non-managers. Of the supply chain
management professionals that did not participate, 216 are male and 147 are female, and
160 of the respondents are managers and 187 are non-managers.

Sample Characteristics. The sample consists of 504 supply chain management
professionals. The characteristics of the respondents are presented in Table 6. The
sample comprises 336 males and 168 females. Segmented by industry, 190 respondents
are ﬁ'om SIC 350, 118 respondents are from SIC 360, 107 respondents are from SIC 370,
and 89 respondents are from SIC 380. Respondents from ﬁrms of less than 500
employees amounted to 153, and 351 respondents are from ﬁrms with greater than 500
employees. Segmented by job title, 253 of the respondents are managers and 251 are
non-managers.

Unit of Analysis. Consistent with transaction cost economics, the unit of analysis

for this research is the exchange relationship (Williamson 1985; 1975). This research

 

4 Corresponds to North American Industry Classiﬁcation System (NAICS) codes 333, 334, 335, 336, and
339

62

focuses on the adaptation of the exchange relationship from the buyer’s perspective. The
focal exchange relationship for this research is the relationship between a buyer and its
supplier established before the addition of a new customer by the supplier. The
conceptualization of the need to adapt the exchange relationship arises from the addition
of a new customer by the supplier. The addition of the new customer introduces an
external disturbance to the relationship between the buyer and the supplier which needs
to be accounted for to prevent maladaptation costs (Williamson 1991).

Design and Procedure. Seven individual role-playing scenarios using a 2 x 2
mixed design experiment were conducted to test the model. Subjects were presented a
role-playing scenario where they were to imagine themselves in a given treatment
condition. Role-playing scenarios provide controlled study of behavior where subjects
enact the scenario described (Geller 1978) and can be an appropriate research method to
capture the decision making process of subjects (Forward et al. 1976). The use of role-
playing experiments has been shown to be an effective approach for operationalizing
variables in a supply chain context (Achrol and Gundlach 1999; Dutta and John 1995;
Jackson Jr. et a1. 1984; Joshi and Arnold 1997; Pilling et al. 1994; Wuyts et al. 2004). In
each experiment, the transaction cost variable (buyer asset speciﬁcity, buyer performance
ambiguity, buyer demand uncertainty, and buyer technological uncertainty) is tested
between groups, and the network variable (centrality and density) is tested within groups.
Scenarios for each treatment are presented in Appendix 8 to 21. Each treatment consists
of 36 randomly assigned subjects. To control for order effect, in each of the seven
experiments, the subjects are divided into two groups of 18 subjects each. For one group,

the high treatment for the Within group variable (centrality or density) is presented ﬁrst.

63

For second group, the low treatment for the within group variable (centrality or density)
is presented ﬁrst.

The scenario was developed for the subjects to role-play the position of a supply
chain manager responsible for acquiring CD-ROM drives for a leading computer
manufacturer. The choice of CD-ROM drives was made based on the subjects’
familiarity of CD-ROMS drives, the need to exchange technical and marketing
information to integrate the CD—ROM drive with the computer, and the market maturity
for CD-ROM drives. The purchase of CD-ROM drives requires the subject to weigh the
decision to continue working with the current supplier while retaining the option to
switch to another supplier. Acquiring the CD-ROM drive requires the buyer to share
sensitive technical and marketing information with the supplier, exposing the buyer to
opportunistic behavior on behalf of the supplier (Williamson 1985; 1975). In contrast,
the buyer may protect against opportunistic behavior by developing norms and familiarity
with the supplier (Heide and John 1992; Noordewier et al. 1990) through repetitive
purchases over a period of time and retaining the option to exit the relationship and
purchase the CD-ROM drives from other suppliers in a mature market.

Each treatment was administered over the phone. Presentation of the scenario and
collection of data took approximately ﬁve minutes for each treatment. For each scenario,
each subject was instructed to assume a role-playing posture in which they assumed the
position of supply chain manager responsible for buying CD-ROM drives for a leading
computer manufacturer. For each subject, vertical coordination was deﬁned followed by
presentation of the assigned scenario. In the mixed design experiment, each subject was

ﬁrst presented their assigned treatment regarding the transaction cost economics variable

64

of interest and asked the degree of coordination they would recommend with the supplier
on a 7-point scale (1 = very limited coordination, 7 = very extensive coordination). The
subjects were then informed that the supplier had unexpectedly added a new customer
that had previously not worked with any suppliers in their network. This was followed
by administering a within subject treatment of the network variable (centrality or
density). After each treatment, subjects were instructed to recommend one of three
choices of action (ﬁnd another supplier, produce internally, or continue purchasing from
the current supplier). If a subject recommended to continue purchasing from the current
supplier, then they were instructed to recommend the level of coordination they would
have with the supplier after the addition of the new customer on a ll-point scale (-5 =
extremely decrease, 0 = same level of coordination, 5 = extremely increase). Each
scenario was concluded by gathering data on the subjects experience in supply chain
management (number of years), position, supplier network size, industry, and ﬁrm size

(number of employees).

Dependent Variable

Vertical Coordination. Vertical coordination is conceptualized as the purposive
organization of the ﬂow of activities and information between the buyer and the supplier
(Andersen and Buvik 2001; Buvik and Andersen 2002; Buvik and Gronhaug 2000; Buvik
and John 2000). Vertical coordination is operationalized as the degree of information
exchanged between the buyer and the supplier. Information exchanged included
production costs, market conditions for the end product, future market strategies, and
joint efforts in product development and quality control (Andersen and Buvik 2001;

Buvik and Andersen 2002; Buvik and Gronhaug 2000; Buvik and John 2000).

65

Independent Variables

Buyer Asset Specificity. Buyer asset speciﬁcity is conceptualized as the buyer’s
investments that are undertaken in support of a particular transaction, where the salvage
value of the investments is much lower in best alternative uses or by alternative users
should the original transaction be prematurely terminated (Williamson 1985; 1975).
Buyer asset speciﬁcity describes the investments made by the buyer in physical assets,
production processes, and knowledge that are Speciﬁc to the supplier (Buvik and John
2000; Heide and John 1990; Joshi and Stump 1999). Buyer asset speciﬁcity is
operationalized as the degree of investment by the buyer speciﬁcally with the current
supplier. The treatment for buyer asset speciﬁcity contrasts the degree of investment by
the buyer with the current supplier. Buyer asset speciﬁcity is manipulated as “You have
made signiﬁcant investments speciﬁcally with this supplier” (high buyer asset Speciﬁcity)
and “You have made few investments specifically with this supplier” (low buyer asset
speciﬁcity).

Buyer Performance Ambiguity. Buyer performance ambiguity is conceptualized
as the uncertainty of the buyer to accurately evaluate the supplier’s ex post performance
(Heide and John 1990). Buyer performance ambiguity is operationalized as the inability
of the buyer to accurately predict supplier performance with regard to price and delivery
(J oshi and Stump 1999). Buyer performance ambiguity is manipulated as “You have
been unable to accurately measure prices and delivery performance of this supplier
easily (high buyer performance ambiguity) and “You have been able to accurately

measure prices and delivery performance of this supplier easily (low buyer performance

ambiguity).

66

Buyer Demand Uncertainty. Demand uncertainty is conceptualized as the buyer’s
inability to accurately forecast the volume requirements (Walker and Weber 1984).
Buyer demand uncertainty reﬂects the changing conditions of the markets that the
organization is engaged (Buvik and John 2000), and the buyer’s inability to forecast
accurately the demand for the components from the supplier (Heide and John 1990).
Buyer demand uncertainty is operationalized as the degree of demand uncertainty facing
the buyer due to demand volatility and the ability to forecast production volumes for the
supplier (Buvik and John 2000). Buyer demand uncertainty is manipulated as “T he
demand for your computers varies continually and it is diﬁ‘icult to forecast production
volumes for your supplier” (high buyer demand uncertainty) and “The demand for your
computers is steady and it is easy to forecast production volumes for your supplier ” (low
buyer demand uncertainty).

Buyer Technological Uncertainty. Buyer technological uncertainty is
conceptualized as the buyer’s inability to accurately forecast technical requirements
(Walker and Weber 1984). Buyer technological uncertainty reﬂects the frequency of
expected changes to the component and future technological improvements to the
component (Andersen and Buvik 2001; Buvik and Gronhaug 2000; Buvik and John
2000). Buyer technological uncertainty is operationalized as the degree of technological
uncertainty facing the buyer due to technological change and the ability to forecast
requirements (Heide and John 1990). Buyer technological uncertainty is manipulated as
“Technology changes rapidly and it is diﬁ‘icult to forecast requirements ” (high buyer
technological uncertainty) and “Technology changes slowly and it is easy to forecast

requirements ” (low buyer technological uncertainty).

67

Supplier New Customer Centrality. Centrality in a network is conceptualized as
the organization’s position in the network relative to others (Wasserman and Faust 1994).
Network centrality measures the degree to which organizations occupy a position of
inﬂuence and status within the network (Podolny 1993). Supplier new customer
centrality is operationalized as the new customer’s competitive position in the industry
network and the number of ties with other organizations in the industry (Antia and
Frazier 2001). Supplier new customer network centrality is manipulated as “The
supplier ’s new customer is a competitor and maintains many ties with other
organizations within the industry” (high supplier new customer network centrality) and
“The supplier’s new customer is not a competitor and maintains few ties with other
organizations within the industry” (low supplier new customer network centrality).

Buyer Supplier Network Density. Buyer supplier network density is
conceptualized as the interconnectiveness of organizations within a network (Coleman
198 8). Buyer supplier network density reﬂects the relative number of links between
organizations within the buyer’s supplier network. Buyer supplier network density is
operationalized as the cohesiveness of the buyer’s supplier network and interaction
amongst the suppliers (Antia and Frazier 2001). Buyer supplier network density is
manipulated as “Your network of suppliers is very cohesive with extensive interaction
amongst the suppliers” (high buyer supplier network density) and “Your network of
suppliers is not very cohesive with no interaction amongst suppliers ” (low buyer supplier

network density).

68

Control Variables

Purchasing Frequency. Transaction cost economics assumes that purchasing
frequency is associated with specialized assets in support of the transaction, and that
increased asset speciﬁcity increases the exposure to opportunism (Williamson 1985;
1975). To control for purchase frequency, purchase frequency is held constant across the
scenarios at a high level (You have been frequently purchasing CD-ROM drives from a
single supplier... ).

Relationship Duration. As the duration of the relationship increases between two
ﬁrms, relational norms, trust, and personal relationships evolve between the supplier and
buyer, reducing the threat of opportunism and decreasing ex post transaction costs
(Bradach and Eccles 1989; Heide and John 1992). To control for relationship duration,
relationship duration is held constant across the scenarios at two years (. . .frequently
purchasing CD-ROM drives from a single supplier for two years).

Industry. The propensity to vertically integrate and supplier network
conﬁguration vary between industries (Balakrishnan and Wemerfelt 1986; Bell 2005).
To control for differences between industries, the product purchased (CD-ROM drives)
and the end product (computer) are held constant across scenarios. In addition, the
industry for each subject was collected to investigate the consistency of responses from
the subjects across the four industries comprising the sampling frame.

Firm Size. Firm size can inﬂuence the behavior of the ﬁrm (Cyert and March
1992). Research has shown that larger ﬁrms have access to greater resources and an
ability to overcome the cost of changing the suppliers (Anderson 1985). Larger ﬁrms

may have greater bargaining power and can negotiate for greater control in their

69

relationships with suppliers (Ganesan 1993). F inn size is controlled for by two methods.
First, ﬁrm Size is held constant between the scenarios by instructing subjects that they are
purchasing components for a leading computer manufacturer (Imagine you are a supply
chain manager responsible for acquiring CD-ROM drives for a leading manufacturer of
computers). Second, post hoc, using data gathered from each subject, ﬁrm size
(measured as number of employees) is used to investigate the consistency of responses

from subjects for ﬁrms with less than 500 employees (coded as 0) and ﬁrms with greater

than 500 employees (coded as l)5.

Gender. The gender of the subjects was collected and coded using a dummy

variable. Male subjects are coded as 1, and female subjects are coded as 0.

 

5 In the United States, the Small Business Administration has traditionally deﬁned small businesses as less
than 500 employees.

70

CHAPTER FIVE

RESULTS

The hypotheses are tested using seven role-playing mixed design experiments.
The transaction cost economics variables, buyer asset speciﬁcity, buyer performance
ambiguity, buyer demand uncertainty, and buyer technological uncertainty, are tested
between groups. The network variables, supplier new customer centrality and buyer
supplier network density, are tested within groups. Following accepted practice in the
marketing discipline, signiﬁcance of hypothesis testing is found at p-values of 0.05 and
0.1. For each of the experiments where hypotheses were tested in a mixed design, a
Bonferroni correction factor is applied to account for the use of the same subjects in

testing two hypotheses. A summary of the results is presented in Tables 7 and 8.

Transaction Cost E conomics Prescriptions

Hypothesis One. Consistent with transaction cost economics, H1 postulates when

signiﬁcant assets are invested by the buyer speciﬁcally with the supplier, the buyer will

desire greater vertical coordination with the supplier. In support of H1, buyer asset

speciﬁcity has a signiﬁcant impact on vertical coordination with the supplier (p < 0.05;
Bonferroni Correction Factor p < 0.1), with the buyer desiring greater vertical
coordination when the buyer has invested signiﬁcant assets speciﬁcally with the supplier.
The Levene statistic indicates that the two groups have homogenous variance (p = 0.995,

NS). Analysis of the control variables for industry (F = 0.443, NS), ﬁrm size (p = 0.285,

71

NS), and, gender (p = 0.616, NS) indicate no signiﬁcant effect on buyer asset speciﬁcity
and vertical coordination.
Hypothesis Two. Hypothesis 2 postulates when buyer performance ambiguity

increases, the buyer will desire greater vertical coordination with the supplier. In support

of H2, buyer performance ambiguity has a signiﬁcant impact on vertical coordination

with the supplier (p < 0.05; Bonferroni Correction Factor p < 0.05), with the buyer
desiring greater vertical coordination when buyer performance ambiguity increases. The
Levene statistic indicates that the two groups have homogenous variance (p = 0.053, NS).
Analysis of the control variables for industry (F = 0.583, NS), ﬁrm size (p = 0.918, NS),
and gender (p = 0.454, NS) indicate no signiﬁcant effect on buyer performance ambiguity
and vertical coordination.

Hypothesis Three. Hypothesis 3 postulates when buyer demand uncertainty

increases, the buyer will desire greater vertical coordination with the supplier. In support

of H3, as buyer demand uncertainty increases, the buyer desires greater vertical

coordination with the supplier (p < 0.05; Bonferroni Correction Factor p < 0.05). The
Levene statistic indicates that the two groups do not have homogenous variance (p =
0.021), and analysis of this hypothesis does not assume equal variances between the two
groups. Analysis of the control variables for industry (F = 0.861, NS), ﬁrm size (p =
0.878, NS), and gender (p = 0.540, NS) indicate no signiﬁcant effect on buyer demand
uncertainty and vertical coordination.

Hypothesis Four. Hypothesis 4 postulates when buyer technological uncertainty
increases, the buyer will desire less vertical coordination with the supplier. The results

indicate that there is not a signiﬁcant difference between the low and high treatments of

72

technological uncertainty and the buyer’s desire for vertical coordination (p = 0.216, NS).

Therefore, H4 is not supported. The Levene statistic indicates that the two groups have

homogenous variance (p = 0.735, NS). Analysis of the control variables for industry (F =
0.295, NS), ﬁrm size (p = 0.348, NS), and gender (p = 0.366, NS) indicate no signiﬁcant

effect on buyer technological uncertainty and vertical coordination.

Supplier New Customer Centrality

Hypothesis Five. Hypothesis 5 predicts the centrality of the supplier’s new
customer in the industry network will be positively related to buyer performance
ambiguity. The results indicate that for both high and low buyer performance ambiguity

there 5 not a signiﬁcant difference between the high and low treatments for centrality of

the supplier’s new customer. Therefore, H5 is not supported.

The Levene statistic indicates that the groups for the centrality of the supplier’s
new customer for both the high buyer performance ambiguity (p = 0.548, NS) and low
buyer performance ambiguity (p = 0.801 , NS) treatments have homogenous variances.
An order effect is present in the within group centrality treatment for the high buyer
performance ambiguity treatment (Central customer presented ﬁrst, p = 0.01; Non-central
customer presented ﬁrst, p = 0.02) and low buyer performance ambiguity treatment (N on-
central customer presented ﬁrst, p = 0.035). Analysis of the control variables for each

buyer performance ambiguity treatment indicate industry (FLOW = 0.433, NS; FHigh =
0.307, NS), ﬁrm size (pLOW = 0.135, NS; pHigh = 0.233, NS), and gender (pHigh = 0.457,

NS) have no signiﬁcant effect on centrality of the supplier’s new customer and buyer

performance ambiguity. However, the results for the low buyer performance ambiguity

73

treatment indicate a signiﬁcant difference in responses due to gender (pLOW = 0.035),

with females having greater performance ambiguity when a central customer is added by
the supplier.

Hypothesis Six. Hypothesis 6 predicts the centrality of the supplier’s new
customer in the industry network will be positively related to buyer demand uncertainty.
The centrality of the supplier’s new customer increases the buyer demand uncertainty for

the low treatment for buyer demand uncertainty (p < 0.1), but is not signiﬁcant for the

high treatment of buyer demand uncertainty, providing partial support for H6.

The Levene statistic indicates that the groups for the centrality of the supplier’s
new customer for both the high (p = 0.805, NS) buyer demand uncertainty and low (p =
0.249, NS) buyer demand uncertainty treatments have homogenous variances. An order
effect is present in the within group centrality treatment for the high buyer demand
uncertainty treatment (N on-central customer presented ﬁrst, p= 0.014), but is not present
in the low demand uncertainty treatment within group centrality treatment. Analysis of
the control variables for each buyer demand uncertainty treatment indicate industry

(F

L0 = 0.624, NS; F - = 0.049, NS; Tukey test indicates no difference between
W High

industries), ﬁrm size (pLow = 0.876, NS; pHigh = 0.235, NS), and gender (pLOW = 0.590,

NS) have no signiﬁcant effect on centrality of the supplier’s new customer. However, the
results for the high buyer demand uncertainty treatment indicate a signiﬁcant difference

in res onses due to gender (p . = 0.007), with females having greater demand
P HIgh

uncertainty when a central customer is added by the supplier.

74

Hypothesis Seven. Hypotheses 7a1, 7a2, and 7b test the moderating effect of the
centrality of the supplier’s new customer in the industry network on the buyer asset
speciﬁcity/vertical coordination relationship. Hypothesis 7a1 predicts the buyer will
prefer the market governance option and switch to a new supplier instead of producing
the component internally or continuing to purchase from the current supplier when the

supplier’s new customer occupies a central position in the industry network. In support

of H7a1, when the supplier’s new customer is central to the industry network, buyers

Signiﬁcantly Opted for market governance for both the high (p < 0.05) and low (p < 0.05)
treatments of buyer asset speciﬁcity.
Hypothesis 7a2 predicts the buyer will continue purchasing from the current

supplier when the supplier’s new customer is not central to the industry network. In

support of H732, when the supplier’s new customer is not central to the industry network,

buyers Signiﬁcantly opted to continue purchasing from the current supplier for both the
high (p < 0.05) and low (p < 0.05) treatments of buyer asset speciﬁcity.

If the buyer chose to continue purchasing from the current supplier after the

addition of the new customer, then H71, predicts the centrality of the supplier’s new

customer will positively moderate the relationship between buyer asset speciﬁcity and
vertical coordination. The results indicate that the position the supplier’s new customer

in the industry network does not have a signiﬁcant inﬂuence on the degree of vertical

coordination desired by the buyer. Therefore, H7b is not supported.

The Levene statistic indicates that the groups for the centrality of the supplier’s

new customer treatment for the high buyer asset speciﬁcity treatment have homogenous

75

variances (p = 0.250, NS). However, the Levene statistic indicates that the groups for the
centrality of the supplier’s new customer treatment for the low buyer asset speciﬁcity
treatment do not have homogenous variances (p = 0.032), and analysis of the low buyer
asset speciﬁcity treatment does not assume equal variances between the two groups. An
order effect is not present for the within group centrality treatment for either the high
buyer asset speciﬁcity or low buyer asset Speciﬁcity treatments. Analysis of the control

variables for each buyer asset speciﬁcity treatment indicate industry (FLOW = 0.067, NS;

F = 0.773, NS), ﬁrm size (p = 0.588, NS; p . = 0.413, NS), and gender (p
Low High Low

High
= 0.779 NS) have no signiﬁcant effect on the centrality of the supplier’s new customer
within group treatment. However, the results for the high buyer asset speciﬁcity

treatment indicate a signiﬁcant difference in responses due to gender (pHigh = 0.003)

with females desiring greater vertical coordination when a central customer is added by

the supplier.

Buyer Supplier Network Density

Hypothesis Eight. Hypotheses 8a1, 8a2, and 8b test the moderating effect of

buyer supplier network density on the buyer asset speciﬁcity/vertical coordination

relationship. H8al predicts when the buyer’s supplier network density is low, the buyer

will prefer the market governance option and switch to a new supplier instead of

producing the component internally or continuing to purchase from the current supplier.

In support of H881, when the buyer’s supplier network density is low, buyers

76

Signiﬁcantly opted for market governance for both the high (p < 0.05) and low (p < 0.05)
treatments of buyer asset speciﬁcity.

Hypothesis 8a2 predicts the buyer will continue purchasing from the current

supplier when the buyer supplier network density is high. In support of Hgaz, when the

buyer supplier network density is high, buyers signiﬁcantly opted to continue purchasing
form the current supplier for both the high (p < 0.05) and low (p < 0.05) treatments of
buyer asset Speciﬁcity.

If the buyer chose to continue purchasing from the current supplier after the

addition of the new customer, then Hgb predicts the density of the buyer’s supplier

network will inversely moderate the relationship between buyer asset speciﬁcity and
vertical coordination. For both treatments of buyer asset speciﬁcity, when the buyer has
invested signiﬁcant assets and when the buyer has invested few assets speciﬁcally with

the supplier, the density of the buyer’s supplier network does not signiﬁcantly moderate

the relationship between buyer asset speciﬁcity and vertical coordination. Therefore, Hgb

is not supported.

The Levene statistic indicates that the groups for the buyer’s supplier network
density for both the high buyer asset speciﬁcity (p = 0.271, NS) and low buyer asset
speciﬁcity (p = 0.709, NS) treatments have homogenous variances. An order effect is not
present in the within group buyer’s supplier network density treatment for either the high
buyer asset speciﬁcity or low buyer asset speciﬁcity treatments. Analysis of the control
variables indicate a difference in responses for the buyer’s supplier network density due

to industry (FHigh = 0.022), where respondents ﬁ'om SIC 360 desire greater vertical

77

coordination than respondents from SIC 350. No differences in the buyer’s supplier

network density within group treatment are detected due to industry (FLow = 0.093, NS),
ﬁrm size (pHigh = 0.474, NS; pLOW = 0.347, NS), and gender (pHigh = 0.308, NS; pLOW =

0.395, NS).
Hypothesis Nine. Hypotheses 9a1, 9a2, and 9b test the moderating effect of buyer

supplier network density on the buyer performance ambiguity/vertical coordination

relationship. H931 predicts when the buyer’s supplier network density is low, the buyer

will prefer the market governance option and switch to a new supplier instead of
producing the component internally or continuing to purchase ﬁ'om the current supplier.
For both the high and low treatments of buyer performance ambiguity, the results indicate

in low density buyer supplier networks, buyers did not signiﬁcantly opt for market

governance. Therefore, H981 is not supported.

Hypothesis 9a2 predicts when the buyer’s supplier network density is high, the
buyer will continue to purchase from the current supplier. For both the high and low

treatments of buyer performance ambiguity, the results indicate buyers did not

signiﬁcantly choose to continue purchasing from the current supplier. Therefore, H9212 is

not supported.

If the buyer chose to continue purchasing from the current supplier after the

addition of the new customer, then H91, predicts the density of the buyer’s supplier

network will inversely moderate the relationship between buyer performance ambiguity

and vertical coordination. For both treatments of buyer performance ambiguity, the

78

density of the buyer’s supplier network does not signiﬁcantly moderate the relationship

between buyer performance ambiguity and vertical coordination. Therefore, H9}, is not

supported.

The Levene statistic indicates that the groups for buyer’s supplier network density
for the high buyer performance ambiguity (p = 0.603, NS) treatment have homogenous
variances. The Levene statistic (p = 0.015) indicated that the groups for the low buyer
performance ambiguity treatment did not have homogenous variances, and the analysis is
conducted assuming not equal variances. An order effect is not present in the buyer’s
supplier network density within group treatment for either the high buyer performance
ambiguity or low buyer performance ambiguity treatments. Analysis of the control

variables for industry (FHigh = 0.137, NS; FLow = 0.264, NS), ﬁrm size (pHigh = 0.257,
NS; pLOW = 0.865, NS), and gender (pHigh = 0.968, NS; pLOW = 0.261, NS) indicate no

signiﬁcant effect on the buyer’s supplier network density within group treatment.
Hypothesis T en. Hypotheses 10a], 10a2, and 10b test the moderating effect of

buyer supplier network density on the buyer demand uncertainty/vertical coordination

relationship. H1081 predicts when the buyer’s supplier network density is low, the buyer

will prefer the market governance option and switch to a new supplier instead of

producing the component internally or continuing to purchase from the current supplier.

In support of H1031, when the buyer’s supplier network density is low, buyers

signiﬁcantly opted for market governance for both the high (p < 0.05) and low (p < 0.05)

treatments of buyer demand uncertainty.

79

Hypothesis 10a2 predicts the buyer will continue purchasing from the current

supplier when the buyer supplier network density is high. In support of H1032, when the

buyer supplier network density is high, buyers signiﬁcantly opted to continue purchasing
form the current supplier for both the high (p < 0.05) and low (p < 0.05) treatments of
buyer demand uncertainty.

If the buyer chose to continue purchasing from the current supplier after the

addition of the new customer, then H101, predicts that the density of the buyer’s supplier

network will inversely moderate the relationship between buyer demand uncertainty and
vertical coordination. The density of the buyer’s supplier network does not moderate the
degree of vertical coordination for the high buyer demand uncertainty treatment;
however, the density of the buyer’s supplier network signiﬁcantly moderates the low
buyer demand uncertainty treatment (p < 0.05; Bonferroni Correction Factor p < 0.1),

with the buyer desiring greater vertical coordination when buyer supplier network density

is low. Therefore, H101, is partially supported.

The Levene statistic indicates that the groups for the buyer’s supplier network
density for both the high buyer demand uncertainty (p = 0.500, NS) and low buyer
demand uncertainty (p = 0.118, NS) treatments have homogenous variances. An order
effect is present in the buyer’s supplier network density within group treatment for the
high buyer demand uncertainty treatment (Central customer presented ﬁrst, p = 0.024),
but is not present in the buyer’s supplier network density within group treatment for the

low demand uncertainty treatment. Analysis of the control variables for industry (FHigh

= 0.414, NS; FLOW = 0.677, NS), ﬁrm size (pLOW = 0.475, NS), and gender (pHigh =

80

0.766, NS; pLOW =0.190, NS) indicate no signiﬁcant effect on the buyer’s supplier

network density within group treatment. However, for the high buyer demand

uncertainty treatment, ﬁrm size (pHigh = 0.039) indicated a difference in responses

between small (< 500 employees) and large (> 500 employees) ﬁrms, with smaller ﬁrms
desiring greater vertical coordination.
Hypothesis Eleven. Hypotheses 1 1a1, 11a2 and 11b test the moderating effect of

buyer supplier network density on the buyer technological uncertainty/vertical

coordination relationship. H1131 predicts when the buyer’s supplier network density is

low, the buyer will prefer the market governance option and switch to a new supplier

instead of producing the component internally or continuing to purchase from the current

supplier. In support of H1 131, when the buyer’s supplier network density is low, buyers

signiﬁcantly opted for market governance for both the high (p < 0.05) and low (p < 0.05)
treatments of buyer technological uncertainty.

Hypothesis 11a2 predicts the buyer will continue purchasing from the current

supplier when the buyer supplier network density is high. In support of H1132, when the

buyer supplier network density is high, buyers signiﬁcantly opted to continue purchasing
form the current supplier for both the high (p < 0.05) and low (p < 0.05) treatments of
buyer technological uncertainty.

If the buyer chose to continue purchasing ﬁom the current supplier after the

addition of the new customer, then H111, predicts that the density of the buyer’s supplier

network will inversely moderate the relationship between buyer technological uncertainty

81

and vertical coordination. The buyer’s supplier network density signiﬁcantly increases
the degree of vertical coordination when buyer technological uncertainty is high (p < 0.1;
Bonferroni Correction Factor, NS); however, when buyer technological uncertainty is

low the density of the buyer’s supplier network does not signiﬁcantly moderate the

relationship. Therefore, H1 1b is partially supported.

The Levene statistic indicates that the groups for the buyer’s supplier network
density for both the high buyer technological uncertainty (p = 0.317, NS) and low buyer
technological uncertainty (p = 0.729, NS) treatments have homogenous variances. An
order effect is not present in the within group density treatment for either the high buyer
technological uncertainty or low buyer technological uncertainty treatments. Analysis of

the control variables for industry (F = 0.565, NS; Flow = 0.480, NS), ﬁrm size

High
(pHigh = 0.346, NS; pLOW = 0.453, NS) gender (pHigh = 0.130, NS; pLOW = 0.183, NS)

indicate no signiﬁcant effect on the buyer’s supplier network density within group

treatment.

82

CHAFI‘ ER SIX

THEORETICAL AND MANAGERIAL CONTRIBUTIONS OF THE STUDY

The objective of this dissertation was to integrate a network perspective with
transaction cost economics. Speciﬁcally, this research addressed how a buyer adapts its
relationship with a supplier due to structural changes occurring within a network of
suppliers. A limitation of transaction cost economics is a failure to account for
“interdependencies among a series of related contracts” (Williamson 1985, p. 393) when
examining a relationship between a buyer and supplier. Scholars have recently suggested
that to fully understand dyadic relationships, a network perspective needs to be
incorporated (Antia and Frazier 2001; Geyskens et al. 2006; Wathne and Heide 2004).
Using established transaction cost economics logic, this research integrated the structural
dimensions of centrality and density from network theory to address the governance of a
buyer with a current supplier that has added a new customer. The addition of the new
customer introduces uncertainty in the existing dyadic relationship between the buyer and
the current supplier due to the change in the surrounding network. As such, this research
focuses on the buyer’s adaptation of the dyadic governance and addresses the following
two research questions. First, does the centrality in the industry network of the supplier’s
new customer inﬂuence the governance in an existing relationship? Second, does the
density of the buyer’s supplier network moderate the governance with the current
supplier when a new relationship is added to the network? The results of this research
provide evidence that dyadic relationships are inﬂuenced by the network in which they
exist, and a deeper understanding of adaptive governance is gained when a network

perspective is integrated with transaction cost economics logic.

83

Theoretical Contributions

Four conclusions are drawn from the results of this research. First, the transaction
cost economics prescriptions of increased transaction asset speciﬁcity, behavioral

uncertainty, and demand uncertainty in a buyer-supplier dyadic relationship lead to

increased vertical coordination with a supplier are supported6, providing nomological
support and internal consistency of the model. Second, the centrality in the industry
network of supplier’s new customer increases the future buyer demand uncertainty when
demand uncertainty is initially low and moderates the dyadic governance concerning
buyer asset speciﬁcity. Third, the buyer’s supplier network density moderates vertical
coordination with the supplier when buyer demand uncertainty is initially low and buyer
teChnological uncertainty initially high. Finally, buyer supplier network density has a
Signiﬁcant inﬂuence on governance choice. In low density buyer supplier networks,
buyers opted for market governance, and in high density buyer supplier networks, buyers
Choose to continue purchasing form the current supplier when a new customer is added
by the supplier.

Transaction Cost Economics Prescriptions. Transaction cost economics
prescribes three forms of governance (market, hybrid, and vertical integration) in
managing marketing channels (Heide 1994; Williamson 1985; 1975). Manufacturing
ﬁl‘rns purchase components from a network of suppliers engage in a form of hybrid
governance, where the cost to manage the relationship is greater than market governance
and lower than producing the component internally (Williamson 1991), where the cost of

governance is driven by the degree of asset speciﬁcity, behavioral uncertainty, and

\

Increased technological uncertainty leading to greater vertical coordination with the supplier was not
Supported.

84

environmental (demand and technological) uncertainty. In hybrid governance, as these
dimensions increase, vertical coordination between the buyer and a supplier escalates
(Andersen and Buvik 2001; Buvik and Gronhaug 2000; Combs and Ketchen 1999) and
the level of joint action increases (Heide and John 1990; J oshi and Stump 1999).
Consistent with transaction cost economics, the results of this research provide empirical
evidence in support of increased vertical coordination in hybrid governance when
signiﬁcant investments are made by a buyer speciﬁcally with the current supplier and
When the levels of behavioral and demand uncertainty are elevated (Geyskens et al. 2006;
Rindﬂeisch and Heide 1997; Williamson 1985; 1975).

Hybrid governance requires greater information sharing between the buyer and
the supplier (Celly et al. 1999), placing the buyer in a potentially adverse situation
Concerning the safeguarding of information and assets invested and evaluation of the
Supplier’s performance in complying with the contract. The buyer may be required to
Share proprietary product and process information. Sharing such information, exposes
the buyer to potential opportunistic behavior on behalf the supplier (Provan and Skinner
1 989), requiring safeguarding measures. In hybrid governance, as buyer asset speciﬁcity
i1ICTeaseS, the buyer increases the level of vertical coordination with the supplier to
reCluce the threat of opportunistic behavior and safeguard the assets by greater contract
formalization (Buvik 1998; Cannon et al. 2000) and monitoring (Pilling et a1. 1994). In
relationships where it is difﬁcult for the buyer to measure price and delivery
performance, Heide and John (1990) showed that buyers increased vertical coordination
With the supplier by increasing monitoring and veriﬁcation efforts. Houston and Johnson

(2000) found that performance ambiguity led to increased vertical coordination between a

85

 

buyer and supplier in the formation of a joint venture. Strong forms of hybrid
governance, such as joint ventures and alliances, allow buyers to protect their proprietary
assets and monitor the supplier’s performance through joint ownership and risk sharing
(Heide 1994).

Consistent with prior research (Andersen and Buvik 2001; Buvik and Gronhaug
2000; Combs and Ketchen 1999; Heide and John 1990; Joshi and Stump 1999), the
results of this research indicate that buyers utilizing hybrid governance adapt the
governance with their current supplier by increasing vertical coordination, in the form of
contract adjustments and increased monitoring and veriﬁcation efforts, with the supplier
to protect assets invested with the supplier and reduce behavioral uncertainty when the
Stl‘ucture of the network changes. Increased vertical coordination allows the buyer to
PI‘Otect the assets invested through increased interaction with the supplier to reduce
POtential ex post opportunistic behavior and the misuse of proprietary assets and leakage
of information to the new customer (Wathne and Heide 2000). Increased vertical
cOOrdination can also occur in the form of increased monitoring of the supplier and
veriﬁcation efforts (Heide and John 1990). Monitoring and veriﬁcation reduce the
buyer’s behavioral uncertainty and increase the likelihood of the supplier meeting cost,
gnality, and delivery targets preventing disruption of assembly and excess inventory
<Tarrying costs.

Environmental uncertainty also inﬂuences the level of vertical coordination
between the buyer and supplier (Williamson 1985; 1975). Prior research has studied
environmental uncertainty as demand and technological uncertainty (Geyskens et al.

2006; Rindﬂeisch and Heide 1997). Fluctuations in demand require the buyer to adapt

86

the transaction with the supplier to account for scheduling changes in component
production. Research has shown that demand uncertainty leads to greater vertical
integration (Leiblein et al. 2002; Levy 1985) and increased negotiation costs (Artz and
Brush 2000). As demand uncertainty increases the buyer must communicate the changes
in future demand of the end product to the supplier so the supplier can adjust the
production schedule to prevent component shortages and excess inventory. This research
provides further evidence of increased vertical coordination between the buyer and the
SUpplier to reduce demand uncertainty and is consistent with transaction cost economic
logic. The consistency of these results with the prescriptions of transaction cost
economics provide nomological validity, internal consistency, and validates the model
incorporating the network variables centrality and density presented in this research.
Network Centrality. Centrality of the supplier’s new customer in the industry
inﬂuences the governance decision of the existing relationship between the buyer and the
Cunent supplier. The buyer can protect itself from opportunistic behavior by switching
suppliers (market governance), increase vertical coordination with the supplier, or
Vertically integrate the component and produce it internally. This research indicates that
Vertical integration is the least likely option considered when the supplier adds a new
cllstomer. To counter opportunistic behavior, buyers are more likely to switch to a new
Supplier if the current supplier’s new customer is centrally positioned within the industry
Iletwork. By choosing market governance to address a change in the network structure,
the buyer can reduce the threat of expropriation of assets and leakage of proprietary
information to the supplier’s new customer. Central organizations in a network have

greater prestige and inﬂuence than non-central organizations (Raub and Weesie 1990),

87

and will have greater inﬂuence over the supplier, possibly causing the supplier to divert
resources in support of a central organization. By switching suppliers, the current buyer
eliminates the threat of potential opportunistic behavior on behalf of the supplier, thereby
alleviating the potential of supply disruptions and loss of competitive information from
the supplier to the new customer. Interestingly, if the buyer chooses to stay with the
supplier, the position of the supplier’s new customer does not differentiate the degree of
vertical coordination with the current supplier. This suggests that buyers are relying on
contracts and ex ante conﬁdentially agreements to protect against potential ex post
Opportunistic behavior and the buyers do not perceive the need to increase vertical
coordination upon learning of the supplier’s new customer and may not adapt the
relationship with the current supplier until the commission of opportunistic behavior.
The addition of a centrally positioned new customer by the supplier increases the

bllyer’s demand uncertainty when demand uncertainty is initially low. In low buyer
demand uncertainty, supply chains are stable and a change in suppliers has a greater
ifrlpact than in high buyer demand uncertainty environments where supply chains are
adjusting to changes in demand. Adding a centrally positioned customer by a supplier
Signals to the buyer of a pending change in the demand. The buyer’s demand may
decrease, if the supplier’s new customer is embarking on a market expansion strategy, or
may increase, if the supplier’s new customer is changing suppliers to address a quality
iSsue with its current supplier. Centrally positioned supplier new customers pose a
geater threat to a buyer’s future demand due to their ability to in innovate and introduce
new products to the market (Powell et al. 1996). This ability allows central new

eustomers to capture market share from the buyer by the introduction of new technology

88

and possibly rendering the buyer’s technology obsolete. This research suggests as buyers
become aware of changes in a competitor’s supply chain, buyers adapt the governance
with the supplier to account for the increased uncertainty in future demand of the buyer’s
products. In supplier networks, the focal dyad is not isolated from the network it which it
resides. As this research shows, a change in the network structure surrounding the focal
dyad increases the potential of opportunistic behavior and demand uncertainty that
require adaptation of the governance to prevent maladaption costs (Williamson 1991).
Even though the addition of the new customer added by the supplier is one position away
in the buyer’s supplier network, the position occupied within the industry network has a
direct inﬂuence on the governance of the dyadic relationship between the buyer and
supplier.

Network Density. The buyer’s supplier network density inﬂuences the
governance decision. In sparse buyer supplier networks, relational norms are low (Heide
and John 1992; Noordewier et al. 1990) and the propensity for buyers to switch to a new
Supplier is greater. In markets where there are many qualiﬁed suppliers, buyers may
sWitch to a new supplier after the current supplier adds a new customer to protect against
the loss of propriety information and reduce uncertainty external to the current supplier.
when the buyer’s supplier network density is sparse, buyers switch suppliers more often
than when the supplier network is dense to counter demand uncertainty and elevated
technological uncertainty. This suggests that buyers switch suppliers when the norms,
Shared expectations within the network, and communication amongst the suppliers are
low. In the absence of norms and communication amongst network members, the buyer

is in a position to opportunistically search the market for a new supplier without the

89

current supplier discovering the buyer potentially switching to a new supplier. In
situations where the norms governing the network are not established to due low network
density and technological uncertainty is high, buyers search the market for new
technology and will switch suppliers with greater frequency than in dense networks. This
suggests that when the buyer’s supplier network density is high, the buyer will work
closer with suppliers to develop technologies within the network.

If the buyer chooses to continue purchasing ﬁ'om the supplier, the density of the
buyer’s supplier network inﬂuences the degree of vertical coordination with the supplier.
The density of a network inﬂuences the availability and ﬂow of information between its
members (Coleman 1990; Valente 1995) and can reduce the buyer’s uncertainty when
Changes occur in the structure of the buyer’s supplier network. This research indicates
that the density of the buyer’s supplier network inﬂuences the level of coordination with
the supplier concerning environmental uncertainty but not concerning issues regarding
the supplier directly, such as investments with the supplier and behavioral uncertainty. In
low demand uncertainty enviromnents, the addition of a new customer by a supplier in
the buyer’s supplier network has a stronger signaling effect than in high demand
uncertainty environments. Low demand uncertainty environments are characterized by
Stable market share for organizations competing in the market and established supply
channels. The addition of a new customer by one of the buyer’s suppliers increases the
fl-lture demand uncertainty of the buyer. Two sources of information are available to the
blryer to offset the increase in demand uncertainty. The buyer may gather information
fl‘orn other suppliers in its supplier network, or the buyer may contact the supplier adding

the new customer directly. In sparse networks, the results indicate that buyer’s increase

90

information sharing with the supplier to reduce the increase in demand uncertainty
created by the addition of the new customer. This suggests that in sparse networks, the
ability to gather information from the buyer’s network of suppliers is diminished,
requiring greater coordination with the individual supplier.

Similarly, the density of the buyer’s supplier network inﬂuences the level of
vertical coordination with the supplier adding the new customer in high technological
uncertainty environments. High technological uncertainty environments are
characterized by short product life cycles where technology obsolescence contributes to
the rapid decline in market share of organizations where their technology is superseded
by the competition. In high technological uncertainty environments, the addition of the
new customer has a greater signaling effect to the buyer regarding the potential of future
technology changes. In a dense network, the buyer can access information concerning
impending technology changes through its supplier network and reduce technological
uncertainty. However, in Sparse networks, the lack of information in the network causes
the buyer to increase the vertical coordination with the supplier adding the new customer
1:0 reduce the increased technological uncertainty. Thus, in sparse supplier networks, the
buyer must adapt the governance of the relationship with the supplier to account for the
increase in technological uncertainty in high technological uncertainty environments. In
contrast, dense supplier networks allow the buyer to gather information from its supplier
network negating the need to adapt the governance with the supplier adding the new
customer.

By considering the inﬂuence of the network density in which the dyad resides, a

greater understanding of how buyers adapt their relationships with suppliers extends the

91

prescriptions from transaction cost economics and the management of supplier networks.
The buyer’s supplier network density does not elevate the safeguarding and performance
evaluation problems. Buyers address safeguarding of assets and supplier performance
directly with the supplier in dense or sparse buyer supplier networks. This suggests that
buyers do not gather information from the network to counter opportunistic behavior of
the supplier or increase their bounded rationally to reduce behavioral uncertainty.
However, in low demand uncertainty and high technological uncertainty environments,
the density of the buyer’s supplier network inﬂuences the adaptation of the relationship
With the supplier. In these environments, maladaptation costs occur when a new
customer is added by a supplier in the buyer’s supplier network. In sparse supplier
networks, buyers adapt the governance of the relationship by increasing the vertical
Coordination with the supplier. The increase in vertical coordination suggests that the
Cost of managing the relationship is increased. In dense supplier networks, the need to
adapt the governance is decreased due to the availability of information from the network
of supplier, thereby reducing the cost of managing the relationship with the supplier after
the addition of the new customer. These results indicate that the structure of the network
that the dyad resides inﬂuences the governance decision concerning the adaptation of the
relationship to account for changes in environmental uncertainty.

An additional beneﬁt proposed for dense networks is the ability to sanction and
prevent opportunistic behavior by applying pressure to conform to expectations and
shared norms of the network (Burt 2000; Coleman 1988; Granovetter 1985). This
research suggests that buyers do not use their supplier network to coordinate with other

suppliers in their network to sanction the supplier adding a new customer. The lack of

92

this phenomenon may be due to ethical considerations, the buyer’s reputation with other
suppliers in its supplier network, and advantage accorded to the buyer by the addition of
the supplier’s new customer. Coordinating suppliers to sanction the opportunistic
behavior of one supplier acting opportunistically may violate anti-trust and collusion
statues regarding the management of suppliers. Buyers engaging in sanctioning behavior
risk the loss reputation and trust with other suppliers in their supplier network if the buyer
is viewed as manipulating suppliers for its own interests. Other suppliers will then be
less likely to trust the buyer in ﬁrture transactions. Finally, the buyer is in a position to
capitalize on the supplier’s improved ﬁnancial and technology position. The addition of
a new customer by a supplier reduces the cost of the components produced by the
supplier which can lead to price reductions for the buyer in future negotiations. Also, the
new customer may introduce new technology with the supplier that may improve future

products purchased by the current buyer.

Managerial Contributions

In recent years, there has been considerable interest in the management of
supplier networks (Achrol and Kotler 1999; Wathne et al. 2001; Wathne and Heide
2004). Managing a network of suppliers requires managers to expand beyond the
management of individual relationships and manage the network as a complete entity to
develop synergy and create a competitive advantage. This research illustrates the need to
account for the position of organizations within the industry network and the density of a
manufacturer’s supplier network structure in developing a competitive advantage through
supply chain management. This research has two key implications for managers. First,

the addition of an organization central in the industry network as a new customer by a

93

supplier increases the buyer’s uncertainty in its relationship with the supplier and needs
to be managed ex ante to lower future adaptation costs with the supplier. Second, a dense
network of suppliers is a source of information that reduces the environmental
uncertainty conﬁ'onting the buyer and lowers the cost of managing the overall supplier
network.

As organizations have outsourced activities to a network of suppliers,
organizations lose a degree of control over the use of proprietary information and
decisions by suppliers that add new customers. In contrast to vertically integrated
organizations, manufacturers need to be aware of the potential risks regarding the
safeguarding of information in anticipation of suppliers developing new business
relationships. Manufacturers need to develop contracts to explicitly state the expectations
of suppliers and conﬁdentially agreements to prevent the loss of proprietary information
with the expectation of structural changes in the buyer’s supplier network, such as when a
supplier adds a new customer. Anticipating the addition of customers by suppliers,
manufacturers should structure contracts with provisions to prevent the expropriation of
assets by the supplier’s new customer. Contracts with such provisions prevents excessive
restructuring of relationships with current suppliers and avoids maladaption costs
incurred when the supplier network structure changes.

However, changes to the structure of the supplier network can be a beneﬁt and
manufacturers should be in a position to negotiate with suppliers to strengthen their
competitive position. The addition of a new customer, either a central or non-central to
the industry network, by a supplier increases economies of scale for the supplier.

Manufacturers beneﬁt by being able to negotiate future price reductions for the

94

components purchased. If the manufacturer has designated the supplier as a supplier of
choice in advance of the addition of the new customer, then the manufacturer is in a
position to negotiate the lowest price from this supplier, thereby enhancing its
competitive position and proﬁt margin. Intuitively, manufacturers regard the addition of
a competitor central to the industry network as a potential threat. However, with
forethought in structuring contractual agreements to protect proprietary information
shared with the supplier, manufacturers may beneﬁt and at times should encourage
suppliers to work with centrally positioned customers. By virtue of its central position in
the industry, the new customer confers a degree of prestige to the supplier and enhances
the supplier’s position in the industry. Indirectly, a manufacturer may beneﬁt from
access to new product and process technology available to its supplier, enhancing its own
reputation within the industry.

In contrast, managers may offset the uncertainty created by the addition of a new
customer by one of its suppliers by constructing and maintaining a dense network of
suppliers where information moves throughout the network and norms are developed to
constrain opportunistic behavior. In dense networks, buyers have access to information
ﬂowing between the suppliers which can offset the environmental uncertainty in the focal
dyadic relationship with an individual supplier. By being able to reduce the uncertainty
in the relationship with the supplier adding the customer, the need to increase the vertical
coordination directly with the supplier is diminished. Not only do dense suppliers
networks reduce the need for vertical coordination with an individual supplier, but also
can be applied across the entire supply chain network to reduce the cost of managing the

entire network. By managing each supplier individually, buyers may neglect information

95

available from outside the dyad to reduce uncertainty within the dyad. By accessing the
information available in a dense supplier network, the degree of vertical coordination can
be reduced with all the suppliers, thereby decreasing the overall cost of managing the
supplier network.

In addition, dense supplier networks promote the development of norms and
shared expectations and reduce the potential of the buyer switching suppliers to offset the
uncertainty and opportunistic behavior when new customers are added by suppliers
(Heide and John 1992; Noordewier et al. 1990). Transaction cost economics argues that
purchasing components through market transitions is the least costly option. Viewing
each transaction as an individual transaction, this proposition may indeed be true.
However, when suppliers are arranged in a network, interconnections between multiple
suppliers increase the cost of switching suppliers. Switching suppliers incurs costs to
reestablish interconnections between the new supplier and the existing supplier network.
From a buyer’s perspective, replacing a supplier may not necessarily be the least costly
option. The cost of qualiﬁcation and adaptation of a new supplier to the norms and
expectations of the manufacturer’s supply chain may far exceed the cost of additional
coordination with the current supplier. It may be in the manufacturer’s best interest to
continue the relationship with the current supplier and develop a dense network of
suppliers with efﬁcient means of communication and norms of behavior for the entire
network to restrain opportunistic behavior on the part of both the supplier and the
manufacturer. Thus, the viewing and managing the entire supplier network as a whole
may in the long-term be more efﬁcient than managing each supplier as an individual

entity.

96

Limitations and Future Research Directions

The results and implications drawn from this research should be interpreted in
light of the research method used and normative prescriptions proposed by transaction
cost economics. While several tests of the hypotheses are consistent with the model, the
results should be viewed by considering the following limitations. First, this research
was restricted to supply chain management professionals from the manufacturing
(machinery, electrical, transportation, and measurement) industry to provide a
homogenous sampling frame. The results and implications may differ for service
organizatiOns (Erramilli and Rao 1993). In a network consisting of service organizations,
the level of vertical coordination between buyers and suppliers may be greater due to the
tacit nature of information included in the service purchased. In addition, the
simultaneous consumption and purchase of the service may necessitate a deeper
understanding of the supplier’s production processes and greater protection of proprietary
information. This may lead to greater coordination with suppliers and denser networks
than in the manufacturing industry due to greater co-production of the deliverable
service. Service buyers may also limit suppliers in their networks from working with
competitors to a greater degree due to the competitive advantage of sharing information
with the supplier and the diminished ability to protect tacit information. Future research
could examination the governance response of service organizations.

Second, the research did not limit the inﬂuence of interactions between variables
in the experiments. It is possible that variables such as the duration of the relationship
and the use of transaction speciﬁc assets inﬂuenced the results of tests concerning other

variables in the research. Buyer-supplier relationships that have existed for an extended

97

period of time allow for the development of norms and trust between the buyer and
supplier (N oordewier et al. 1990). Increasing the norms and trust between the buyer and
supplier will diminish the need for coordination and limit the likelihood that the buyer
will switch suppliers when the supplier adds a new customer. Transaction cost
economics also postulates interactions between uncertainty and asset speciﬁcity. While
asset speciﬁcity was controlled for in experiments concerning uncertainty at a low level,
alternative explanations regarding the inﬂuence of asset speciﬁcity this research cannot
be ruled out. An extension of this research could include interactions resulting ﬁ'om the
duration of the relationship and speciﬁc assets invested by the buyer.

Third, this research was limited to buyer-supplier dyads in the US. Extending
this research to international suppliers increases the uncertainty in the dyad and may lead
to greater costs of coordination. International suppliers add another dimension of
complexly in managing a network of suppliers (Buvik and Andersen 2002). Differing
cultures and legal systems require the buyer to protect against counterfeiting by the
supplier and loss of proprietary information. Where enforcement of contracts is minimal,
the buyer may have no recourse in preventing supplier opportunistic behavior. Extending
this research into an international enviromnent will provide interesting insight into global
supply chain management.

Fourth, this research focused on the network structural dimensions, and an
extension of this research would be to include relational network dimensions. Networks
provide governance of relationships due to the content of the information shared between
organizations and the development of norms and shared expectations. The establishment

of norms provides an implicit form of governance within the network, thus offsetting the

98

need for explicit forms of governance. Organizations reframe from acting
opportunistically due to the ability of the network to sanction their actions and remove
them from the network. In dense networks where norms are high and organizations
derive a sense of prestige from membership, the need for coordination and the propensity
of the buyer to switch suppliers is diminished. Investigating relational network

dimensions would be a fruitful area for future research.

99

APPENDICES

100

Appendix 1
E-mail from Clinical Professor in Supply Management

Soliciting Supply Chain Professionals Participation in Research

Best and Brightest,

As you know, one of our research streams at MSU is around supplier relationships /
governance. Wesley Pollitte, a doctoral student at MSU, is initiating a study in this area
— see attached. The purpose of this email is to request your early stage support of Wes’
research by responding to his call for a short interview. Wes will use the ﬁndings from

these initial interviews to develop and test the research described on the attached.

Because of your SM expertise along with your ﬁrm’s reputation as a leader in SM, we’d

like your help. Wes will contact you within the next several days to determine your

interest and availability. Thanks in advance for your support.

101

Appendix 2
Executive Summary Sent to Supply Chain Professionals Soliciting

Participation in Research

The Effects of Vertical Networks on Channel Governance Adaptation:
A Transaction Cost Economics Approach
Wesley A. Pollitte - July, 2007

This research investigates the management of a supplier network from the
perspective of the buyer concerning the adaptation of governance between a supplier and
the buyer as network membership changes. Speciﬁcally, this study focuses on changes in
governance between a supplier and a buyer in a vertical network when the supplier adds a
new customer. The model is examined using a two-stage role-playing experiment with
supply management professionals as key informants to capture the degree of vertical
coordination before and after the addition of the supplier’s new customer.

The experimental design is conducted in two phases; a concept validation and pre-
test phase followed by the actual administering of the experiment in phase two. The ﬁrst
phase involves an iterative process to understand how the conceptual elements of the
adaptive responses and construct items to be tested in the experimental design are
perceived by Supply Management professionals. Upon establishing the conceptual
domain, feedback will be solicited from supply management professionals on the
wording and presentation of the scenarios (seven total scenarios) used in the experiment.
Upon completion of the scenarios, a pre-test will be conducted using supply management
professionals though phone interviews to examine the comprehension and recall of the

key components of each scenario.

102

The second phase of the experiment consists of a two-step experiment. Each
informant is presented with a treatment that addresses a condition prior to the addition of
a new customer by a supplier and a condition after the addition of a new customer by a
supplier. In the ﬁrst step, the informant is to select the preferred level of vertical
coordination based on the conditions presented in the scenario. In the second step, after
the new customer is added, an additional variable is added to the scenario and the
informant is to address the level of vertical coordination required. The hypothesized
outcome of this research is to show that characteristics of the network inﬂuence the level

of vertical coordination in the focal relationship between the buyer and the supplier.

103

Appendix 3

Initial E-mail Soliciting Supply Chain Professionals Participation in Research

XXX

I hope this message ﬁnds you well.

Hello, my name is Wesley Pollitte, and I am a doctoral student at Michigan State
University. Currently I’m initiating my research for my dissertation on buyer-supplier
relationships in a network context. As a supply management professional, you are in a
unique position to supply valuable insights and information in the early phases of this
research and your participation in this research would be greatly appreciated. It is
anticipated that the results of this research will provide guidance in efﬁciently structuring
buyer-supplier relationships by including the inﬂuence of network factors in governance

decision-making.

Recently you were contacted by Joseph Sandor regarding participation in research here at
Michigan State University in support of my dissertation described in the attached. My
research focuses on changes in governance between a buyer and a supplier when the
supplier adds a new customer. Speciﬁcally, my research addresses how do buyers adapt

their relationships with suppliers when membership of a network changes.

This phase of the research concerns developing a greater understanding of how

organizations adapt supplier relationships. Your participation will require answering a

104

few short questions regarding how you would adapt your relationship with a supplier.
Answering the questions should take approximately 15 to 30 minutes. Of course all of

your responses will be conﬁdential and only used by me in support of this research.

I would like to schedule a phone interview with you at your convenience between August

8th and 22nd. Please let me know when you would be available and a phone number

where I can reach you. I can be reached by e-mail at pollitte@msu.edu or by phone at
(517) 432-6454. If you are willing to participate in this research, I can provide you a

summary of the ﬁndings upon its completion.

Again, thank you for consideration in participating in this research. I look forward to

hearing from you in the near ﬁrture.

Wesley Pollitte

Michigan State University

105

Appendix 4

Follow-up E-mail to Soliciting Supply Chain Professionals Participation in Research

XXX

This message is a follow-up to an invitation for research support at Michigan State

University. Previously you received an e-mail from Joseph Sandor on July 16th and me

on July 27th. To date, you have not responded to the opportunity to participate in this

research, and as a supply chain management professional, your input in highly valued in

support of this research.

If you would like to participate in this research, please e-mail me at pollitte@msu.edu or

call me at (517) 432-6454.

I look forward to hearing from you.

Wesley Pollitte

Michigan State University

106

Appendix 5
Research Questionnaire of Adaptive Responses Used in Interviews

With Supply Chain Professionals

Demographic information collected included the professional’s name, position, years of
experience in supply chain management, product responsibility, company name, and

company size (number of employees).

Vertical Coordination Deﬁnition:

This research studies vertical coordination between you as a buyer and your supplier as
part of a network of suppliers. Vertical coordination is the degree of information
exchanged between you and your supplier. This information may include: production
costs, market conditions for the end product, future market strategies, and joint efforts in

product development and quality control.

1. When you structure relationships with suppliers, how does the amount of assets

committed to support a particular supplier inﬂuence the level of vertical coordination

with the supplier? (information exchanged, production costs, etc)

2. When you structure relationships with suppliers, how does your ability to forecast your

product demand inﬂuence the level of vertical coordination with the supplier?

107

3. When you structure relationships with suppliers, how does your ability to forecast

technological changes inﬂuence the level of vertical coordination with the supplier?

4. When you structure relationships with suppliers, how does your ability to predict

prices and delivery performance of that supplier inﬂuence the level of vertical

coordination with the supplier?

5. If one of your current suppliers adds a new customer, what are the types of responses,

if any; you would take in regard to this supplier?

5a. Would you do anything differently now?

5b. If yes, what?

6. If that supplier’s new customer maintains many relations with other organizations in

the industry and is very active in the industry network, how might this affect your

response to that supplier?

6a. Would you do anything differently now?

6b. If yes, what?

108

7. Would your response differ if the supplier’s new customer maintains few relations with

other organizations in the industry and is not very active in the industry network?

7a. Would you do anything differently now?

7b. If yes, what?

8. How do you use your network of suppliers to gather information regarding the supplier

and the new customer?

8a. Does this inﬂuence the level of vertical coordination you have with the

supplier?

This concludes this questionnaire. Is there anything you would like to add?

Also, the information from this interview will be used to generate is seven scenarios to be

used in a role-playing experiment. Would you be willing to critique 2 or 3 scenarios in

the near future?

Thank you for your participation.

109

Appendix 6

Measures-Literature Review

Vertical Coordination

Buvik and Andersen (2002)
Measure: The extent of interﬁrm ﬂows of activities, resources, and information in

Items:

order to coordinate productive values and deal with the realignment of
terms of trade.

Development and testing of new materials and components.
Improvement of products and services delivered to our ﬁrm.

Exchange of information about production and costs ﬁgures.
Improvement of the quality assurance processes.

Selection of materials and components.

Andersen and Buvik (2001)
Measure: The extent that parties carrying out the focal activities in a co-operative

Items:

Jap (2001)

and co-ordinated way.

We are regularly in contact with this supplier as regards to the
development and testing of new materials and components.

We co-operate closely with our supplier in order to improve products
and services delivered to our ﬁrm.

We co-operate closely with this supplier in order to co-ordinate the
production capacity planning of our ﬁrm.

Our ﬁrm co-operates closely with this supplier to improve the quality
assurance processes in its company.

Measure: The regular pattern of similar or complementary actions and activities.

Items: They work on joint projects tailored to their needs.
They work together to exploit unique opportunities.
Both companies are always looking for synergistic ways to do business
together.
Artz and Brush (2000)

Measure: Willingness of the OEM and supplier to work together to create a

Items:

positive exchange relationship.

We share proprietary information with this supplier.

We participate in joint goal setting and forecasting with this supplier.
This supplier does not seek our advice or counsel.

110

Buvik (2000)

Measure: The intensity of inter-ﬁrm co-ordination and the exchange of

Items:

information between the transacting parties.

We cooperate closely with our supplier about quality assurance
processes within its company.

Our firms make regular joint efforts to improve the quality of the
products we order.

Our ﬁrm cooperates closely with this supplier in the following up of
orders.

We cooperate closely with this supplier to improve the quality control
of products and services delivered to our ﬁrm.

Buvik and Gronhaug (2000)
Measure: The extent of interﬁrm ﬂows of activities, resources, and information in

Items:

order to coordinate productive values and deal upon terms of trade.

Our ﬁrms co-operate smoothly to meet complaints and solve conﬂicts.

Our ﬁrm co-operate closely with this supplier in the following up of
order.

Our ﬁrms regulme exchange information about price development and
market conditions.

We co-operate closely with this supplier in the quality control of
products delivered to us.

We co-operate regularly with this supplier as regards testing of new
materials and components.

Buvik and John (2000)
Measure: The purposive organization of the ﬂow of activities and information

Items:

between the transacting parties.

We regularly exchange information about production costs with this
supplier.

We regularly consult with this supplier about its selection or raw
materials and components incorporated in the product(s) we order.

We regularly exchange information about price development and
market conditions with this supplier.

Our ﬁrms make regular joint efforts to improve the quality of the
products we order from this supplier.

We cooperate closely with this supplier on quality control of product
delivered to our company.

111

Specific Assets

Heide (2003)

Measure: Investments made by OEM in physical assets, procedures, and people

Items:

that are tailored to relationship with a particular supplier.

We have made signiﬁcant investments in tooling and equipment
dedicated to our relationship with this supplier.

Our production system has been tailored to meet the requirements of
dealing with this supplier.

Our production system has been tailored to use the particular
components bought from this supplier.

Gearing up to deal with this supplier requires highly specialized tools
and equipment.

This supplier has some unusual technological norms and standards,
which have required adaptation on our part.

Training and qualifying this supplier as involved substantial
commitments of time and money.

Rokkan, Heide, and Wathne (2003)
Measure: Investments made by the buyer dedicated to the relationship with a

Items:

particular supplier.

We have made signiﬁcant investments in equipment dedicated to our
relationship with this supplier.

We have made extensive internal adjustments in order to deal
effectively with this supplier.

Training our people to deal with this supplier has involved substantial
commitments of time and money.

Our logistics systems have been tailored to meet the requirements of
dealing with this supplier.

Buvik and Andersen (2002)
Measure: The investments made by the buyer in physical assets, production

Items:

facilities, tools and knowledge tailored to the speciﬁc purchasing
relationship.

Investments in production equipment.

Speciﬁc insight and knowledge about technological standards.
Speciﬁc resources dedicated to quality assurance programs.
Special equipment and routines for product control.

Resources tailored to restructure production.

Speciﬁc investments in information technology.

112

Skarmeas, Katsikeas, and Schlegelmilch (2002)
Measure: Importer’s investments that are speciﬁc to the focal relationship,
including personnel, training programs, efforts and facilities.
Items: We have made substantial investment in personnel dedicated to this
supplier’s product line.
We give extensive training to our customers on how to use the
supplier’s product line.
We have invested a great deal in building up this supplier’s business.
We have made substantial investments in facilities dedicated to this
supplier’s product line.

Antia and Frazier (2001)
Measure: Extent investments that cannot be redeployed from existing uses and
users except at a signiﬁcant loss of productive value.
Items: If this relationship were to terminate, it would be difﬁcult for us to
recoup investments made in this ﬁanchisee.
Training and qualifying this franchisee has involved considerable
commitments of time and money.
We have invested a great deal in building up this franchisee’s business.
If we were to terminate this franchisee, we would lose a lot of our
investment in him/her.

Buvik and Reve (2001)

Measure: The investments and/or adaptations made by the buyer in physical
assets, production facilities, tools and knowledge tailored to the
relationship. ’

Items: We have committed a lot of time to training of personnel for this

supplier.

Our ﬁrm has committed a lot of time and resources to learn and adapt to
the technical standards of this supplier’s products.

We have made comprehensive investments in transportation equipment
dedicated to deal effectively with this supplier.

We have committed a lot of time and resources to develop speciﬁc
equipment and routines for product control of deliveries from this
supplier.

Our ﬁrm has made comprehensive investments to restructure and
integrate our production facilities with this supplier’s production.

Our ﬁrm has made signiﬁcant investments in information technology
dedicated to the interaction with this supplier.

113

‘ Jap (2001)

Measure: Non-ﬂingible investments that uniquely support the buyer-supplier

Items:

relationship.

If this relationship were to end, they would be wasting a lot of
knowledge that’s tailored to their relationship.

If either company were to switch to a competitive buyer or vendor, they
would lose a lot of the investments made in the present relationship.

They have invested a great deal in building up their joint business.

Artz and Brush (2000)
Measure: The OEM’s physical, human, temporal speciﬁcity.

Items:

Buvik (2000)

We have made signiﬁcant investments in tooling and equipment
dedicated to this supplier.

Qualifying this supplier has involved substantial commitments of time
and money.

The supplier’s product requires technical skills that are unique to this
supplier.

Measure: The investments and/or adaptations made by the buyer in physical

Items:

assets, production facilities, tools and knowledge tailored to the

relationship.

Our ﬁrm has committed a lot of time and resources to adapt to technical
standards of this supplier’s products.

Our ﬁrm has made comprehensive investments in storage and
transportation equipment dedicated to deal effectively with
deliveries from this supplier.

Our ﬁrm has committed a lot of time and resources to develop and
acceptable quality assurance system at this supplier.

Our ﬁrm has committed a lot of time and resources to develop special
equipment and routines for product control of deliveries from this
supplier.

Our ﬁrm has made comprehensive investments to restructure our
production to achieve higher efﬁciency in further processing or
products and materials bought ﬁ'om this supplier.

114

Buvik and John (2000)
Measure: Investments made by OEM in physical assets, production processes,

Items:

tools, and knowledge tailored to the focal supplier.

Our ﬁrm has committed a lot of time and resources to develop speciﬁc
equipment and routines for control of deliveries from this supplier.

Our ﬁrm has made comprehensive investments to restructure and
integrate our production facilities with this supplier’s production
facilities.

Our ﬁrm as invested extensively in production equipment speciﬁcally
adapted to with the products we buy from this supplier

Our ﬁrm has committed a lot of time and resources to developing an
acceptable quality assurance program at this supplier’s plant.

Bensaou and Anderson (I 999)
Measure: The investments speciﬁc to a relationship, which are difﬁcult or

Items:

expensive to transfer to another relationship without losing their value.
Extent to which you believe your ﬁrm has made major investments
speciﬁcally for its relationship with this supplier:
In tooling.
On tailoring its products to using this supplier’s component.
In time and effort to learn this supplier’s business practices.
In time and effort to develop the relationship with this supplier.

Joshi and Stump (1999)
Measure: Speciﬁc asset investments in resources, procedures, and people made by

Items:

the OEM in its relationship with the focal supplier.

We made signiﬁcant investments in resources dedicated to our
relationship with this supplier.

Our operating process has been tailored to meet the requirements of
dealing with this supplier.

Training and qualifying this supplier has involved substantial
commitments of time and money.

This supplier has some unusual technological norms and standards that
have required extensive adaptation on our part.

115

Stump and Heide (I 996)
Measure: The buyer’s initial investments made as part of the purchasing
agreement with a particular supplier.
Items: Our production system that incorporates this item has been tailored to
meet the requirements of dealing with this supplier.
We have spent signiﬁcant resources to ensure that our speciﬁcations for
this item ﬁt well with this supplier’s production capabilities.
Gearing up to deal with this supplier on this item required highly
specialized tools and equipment on our part.
The procedures and routines we have developed to obtain this item are
tailored to the particular situation of this supplier.
This supplier has some unusual technological norms and standards for
the item, which have required extensive adaptations on our part.

Heide and Stump (1995)
Measure: Buyer’s investment in specialized assets and procedures that are
idiosyncratic to a particular supplier relationship.
Items: We have made signiﬁcant investments in tooling and equipment
dedicated to our relationship with this supplier.
Our production system has been tailored to use the particular
components bought from this supplier.

Stump (1 995)
Measure: The extent to which durable investments tailored to the focal supplier
have been made to support a particular transaction.
Items: Our production system that incorporates this item has been tailored to
meet the requirements of dealing with this supplier.
Gearing up to deal with this supplier on this item required highly
specialized tools and equipment on our part.

Heide and John (1992)

Measure: Buyer’s investment in specialized physical assets, organizational
procedures, and training that are idiosyncratic to a particular supplier
relationship.

Items: We have made signiﬁcant investments in tooling and equipment

dedicated to our relationship with this supplier.

This supplier has some unusual technological norms and standards,
which have required adaptation on our part.

Training and qualifying this supplier as involved substantial
commitments of time and money.

Our production system has been tailored to use the particular
components bought from this supplier.

Gearing up to deal with this supplier requires highly specialized tools
and equipment.

116

Heide and John (I 990)
Measure: Investments made by OEM in physical assets, procedures, and people

Items:

that are tailored to relationship with a particular supplier.

We have made signiﬁcant investments in tooling and equipment
dedicated to our relationship with this supplier.

Our production system has been tailored to using the particular items
bought from this supplier.

Klein, Frazier, and Roth (1990)
Measure: The degree to which durable, transaction-speciﬁc assets were found in

Items:

Klein (1989)

the export channel.

It is difﬁcult for an outsider to learn our ways of doing things.

To be effective, a salesperson has to take a lot of time to get to know the
customers.

It takes a long time for a salesperson to learn about this product
thoroughly.

A salesperson’s inside information on our procedures would be very
helpful to our competition.

Specialized facilities are needed to market this product.

A large investment in equipment and facilities is needed to market this
product.

Measure: The degree to which durable, transaction-speciﬁc assets were found in

Items:

the export channel.

It is difﬁcult for an outsider to learn our ways of doing things.

To be effective, a salesperson has to take a lot of time to get to know the
customers.

It takes a long time for a salesperson to learn about this product
thoroughly.

A salesperson’s inside information on our procedures would be very
helpful to our competition.

Specialized facilities are needed to market this product.

A large investment in equipment and facilities is needed to market this
product.

117

Performance Ambiguity

Antia and Frazier (2001)
Measure: Extent of information available regarding agent performance.

Items:

Not possible to supervise closely--Easy to supervise closely.

Difﬁcult to evaluate level of franchisee effort--Easy to evaluate level of
franchisee effort.

Our evaluation is based on very “fuzzy” information--Our evaluation is
based on very accurate information.

Joshi and Stump (1999)
Measure: The degree of predictability of supplier behavior for the OEM.

Items:

We can accurately predict the prices for the input component that will
be charged by this supplier in our next procurement cycle.

We can accurately predict the delivery performance (% of on-time
deliveries) of this supplier for our next procurement cycle.

We know that this supplier will adapt quickly, should we have to
change our order speciﬁcations at short notice.

Bergen, Heide, and Dutta (1998)
Measure: The ex ante difﬁculty faced by the manufacturer in evaluating the

Items:

speciﬁc geographic area covered by the distributor.

There would be signiﬁcant costs associated with monitoring the
activities of this distributor.

At a given time, it would be difﬁcult to evaluate which sales this
distributor covers.

Determining this distributor’s speciﬁc sales would require us to make
frequent on-site inspections.

It would be difﬁcult for us to evaluate exactly who this distributor is
selling to.

Stump and Heide (1996)
Measure: The inherent difﬁculty faced by the buyer in accurately evaluating the

Items:

supplier’s performance.

Precise standards by which to assess this supplier’s performance are not
readily available.

Evaluating this supplier’s performance is a highly subjective process.

This supplier is performing so many different tasks that it is difﬁcult to
determine whether a good job is being done.

It is difficult to determine whether agreed upon quality standards and
speciﬁcations are adhered to.

118

Heide and Stump (I 995)
Measure: Buyer’s evaluation of the given supplier relationship.
Items: Adherence to speciﬁcations.
Delivery performance.

Heide and Miner (1992)
Measure: Assessments of the level of effort a buyer must put forth to assess the
quality of the product produced by a supplier.
Items: It is inadequate to evaluate this supplier based only on component
prrces.

Evaluating the performance of this supplier requires extensive incoming
inspection.

In order to obtain satisfactory assessment of this supplier’s
performance, we need to conduct on-site inspection at the supplier’s
plant.

Conducting performance evaluations of this supplier requires making
sure the follow the approved production and quality control
procedures.

Heide and John (I 990)
Measure: The difﬁculty faced by the buyer (OEM) in evaluating the supplier’s
performance ex post by inspection or other such means.
Items: It is inadequate to evaluate this supplier based only on component
prices.
Conducting performance evaluations of this supplier requires making
sure the follow the approved production and quality control
procedures.

119

Demand Uncertainty

Andersen and Buvik (2001)
Measure: Changing market conditions.
Items: The demand for our end products varies signiﬁcantly over time.
The market conditions for the products we buy from this supplier is
very unstable.

Artz and Brush (2000)
Measure: The price and volume uncertainty.
Items: Price estimates for this supplier’s product are difficult to predict.
The market for the end product that uses this supplier’s component is
highly volatile.
It is difﬁcult to estimate the expected volumes for the supplier’s
component.

Buvik and Gronhaug (2000)
Measure: The changing economic demand conditions.
Items: The demand for our end products varies continually.
The market condition of our supplier is very unstable.

Buvik and John (2000)
Measure: The unpredictability of the task environment.
Items: The demand for our end products varies continually.
The demand conditions for our supplier’s product are very irregular.

Bensaou and Anderson (1999)
Measure: The inability to forecast accurately the volume requirements in the
relationship.
Items: Extent to which volume requirements for this component are
predictable.
Extent to which your ﬁrm’s estimates for this component are reliable.

Robertson and Gatignon (1998)
Measure: The difﬁculty of predicting demand.
Items: Demand is difﬁcult to forecast.
Markets are uncertain.

Heide and Stump (1995)
Measure: Inability to forecast in an accurate fashion the demand for components
in question.
Items: Industry sales volume for end product. ‘unpredictable/predictable”
Your company’s sales volume for end product.
“unpredictable/predictable”

120

Ganesan (1 994)
Measure: Extent to which market and demand changes are rapid.
Items: Unpredictable demand--Predictable demand.
Sales forecasts are accurate--Sales forecasts are inaccurate.
Stable market shares--Volatile market shares.

Heide and John (1990)
Measure: Inability to forecast accurately the demand for components in question.
Items: Industry sales volume for end product. “unpredictable/predictable”
Your company’s sales volume for end product.
“unpredictable/predictable”

Walker and Weber (1 984)
Measure: The assessment of ﬂuctuations in the demand for a component and the
conﬁdence placed in estimates of the demand.
Items: The extent to which signiﬁcant ﬂuctuations are expected in the daily or
monthly volume requirement for the component.

The extent to which volume estimates for the component are expected
to be uncertain.

121

Technological Uncertainty

Andersen and Buvik (2001)
Measure: Technological dynamism.
Items: The product we purchase from this supplier has very high innovation
rates and short life cycles.
Our most important competitors are regularly carrying out signiﬁcant
product adjustments and development of new products.

Antia and Frazier (2001)
Measure: Extent to which the rate of change in the external environment is rapid
and unpredictable.
Items: In our business, customer tastes change rapidly.
Production/service technology changes are few and far between in our
business.
New developments evolve very rapidly in our industry.

Buvik and Gronhaug (2000)
Measure: Technological dynamism.
Items: Our most important competitors are regularly carrying out product
adjustments and development of new products.
The products we buy from this supplier have a high innovation speed
and short life cycle.

Buvik and John (2000)
Measure: The unpredictability of the task environment.
Items: Our most important competitors are regularly carrying out product
adjustments and development of new products.
The products we purchase from our supplier have very high innovation
rates and short life cycles.

Bensaou and Anderson (I 999)
Measure: The likelihood of major changes in a component, its performance, and
its manufacturing processes.
Items: How likely will major changes occur in the component in four areas
(i.e., functionally improvements, major product innovations, major
manufacturing innovations, price/performance ratio improvements)
during the next ﬁve years.

122

Celly, Spelonan, and Kamauﬂ(1999)

Measure: The product complexity and engineering content, as well as the extent
of technical innovation and rate of change in technology.

Items: Complex products-~Simple products.
High technical innovations--Low technical innovations.
Mature process technology--Evolving process technology.
Low engineering content--High engineering content.
Fast changing technology--Slowly changing technology.

Robertson and Gatignon (1998)

Measure: The change in technology in the product category.

Items: The technology is stable.
Life cycles are short.
The technology is moving very fast.
Technology is on a constant plateau.
Technological pressure is intense.
The technology moves rapidly from generation to generation.

Stump and Heide (I 996)
Measure: The inability to predict accurately the technological changes in the
product purchased and its underlying manufacturing processes.
Items: Technological changes in end product. “predictable/unpredictable”
General technological developments in the supply market for the
identiﬁed item. “predictable/unpredictable”
Your ﬁrm’s changes in speciﬁcations for the identiﬁed item.
“predictable/unpredictable”
This supplier’s changes in speciﬁcations for the identiﬁed item.
“predictable/unpredictable”

Stump (I 995 )
Measure: The unpredictability of changes in product and/or process technology.
Items: Technological changes in end product. “predictable/unpredictable”
General technological developments in the supply market for the
identiﬁed item. “predictable/unpredictable”

Heide and John (1990)
Measure: Inability to forecast accurately the technological requirements in the
relationship.
Items: Technological changes in the end product. “unpredictable/predictable”
General technological developments in the supply market for the
components bought. "unpredictable/predictable”

123

Walker and Weber (1984)
Measure: The uncertainty in terms of change in component speciﬁcations.
Items: The frequency of expected changes in speciﬁcations for the component.
The probability of future technological improvements of the
component.

124

Network Density

Antia and Frazier (2001)
Measure: Reﬂects the average strength of relations in a network.

Items:

Franchisees of our system share close ties amongst themselves.

There is very little interaction among our franchisees.

Relations among our franchisees are very close.

Share frequent communications--Rarely communicate with each other.

Frequently discuss common problems--Rarely discuss common
problems.

Extremely close ties--Not very cohesive.

Network Centrality

Antia and Frazier (2001)
Measure: The strength of an individual agent’s position in an agent network.

Items:

This franchisee is a crucial cog in the franchisee network.

The franchisee maintains few relations with other franchisees.

Not at all active in franchise network--Very active in franchise network.

Has few links with other franchisees--Has extensive links with other
franchisees.

Not at all central to our system--Very central to our franchise system.

125

Appendix 7

Pre-test Questionnaire Sent to Supply Chain Professionals
Imagine you are a supply chain manager responsible for purchasing CD-ROMs from a supplier for a
manufacturer of computers. Please answer the following questions regarding the level of
coordination you would have in regards to this supplier.

 

Part 1
How much coordination would you recommend based on the following statements:
(Please Bold Choice)
Limited Extensive
Coordination Coordination

 

If you have made signiﬁcant investments speciﬁcally
with this supplier, where these investments have little
value in alternative uses.

Ifyou are able to accurately measure prices and delivery
performance of this supplier easily. 1 2 3 4 5 6 7

If technology within the industry changes slowly and it
is easy to forecast technological requirements. 1 2 3 4 5 6 7

If demand for your computers is steady and is easy to
forecast. 1234567

If you have made few investments speciﬁcally with this
supplier, where these investments have little value in l 2 3 4 5 6 7
alternative uses.

If you are unable to accurately measure prices and

delivery performance of this supplier easily. 1 2 3 4 5 6 7
If demand for your computers varies continually and is
diﬁicult to forecast. l 2 3 4 5 6 7
Iftechnology within the industry changes rapidly and it
is difficult to forecast technological requirements. 1 2 3 4 5 6 7

 

126

Part 2
How much coordination would you recommend based on the following statements:

(Please Bold Choice)
Limited Extensive
Coordination Coordination

 

If you are a market leader for computers. 1 2 3 4 5 6 7

If you purchase the CD-ROMs from a single supplier. 1 2 3 4 5 6 7
If there are multiple qualiﬁed suppliers of CD-ROMs. 1 2 3 4 5 6 7
If you purchase the CD-ROMs from the supplier l 2 3 4 5 6 7
frequently.

If your deliveries come frequently from your supplier. l 2 3 4 5 6 7
If you are not a market leader for computers. 1 2 3 4 5 6 7
If you purchase the CD-ROMs from multiple suppliers. 1 2 3 4 5 6 7
If there are few qualiﬁed suppliers of CD-ROMs. l 2 3 4 5 6 7
If you purchase CD-ROMs from the supplier 1 2 3 4 5 6 7
infrequently.

If your deliveries come infrequently from your supplier. l 2 3 4 5 6 7

 

Part 3: Your customer’s new supplier

 

If your supplier of CD-ROMs unexpectedly begins to supply a new customer, what response would you
recommend based on your supplier’s new customer characteristics?

 

1. The supplier’s new customer maintains few ties with other

organizations in the industry and is not active in the (Please place “X” on line 0f

network 10f the 3 options)
Find another supplier of CD-ROMs? _ (Please go to question 2)
Produce the CD-ROMs internally? _ (Please go to question 2)
Continue to purchase CD-ROMs from this supplier? __ (Please go to question la)

la. Having chosen to continue purchasing from this -3 -2 -l 0 +1 +2 +3
supplier, what level of coordination would you now Decrease Same Increase
recommend for this supplier? Coordination Coordination Coordination

(Please Bold Choice)
2. The supplier’s new customer maintains many ties with _
other organizations in the industry and is very active in (Please place “X” 91111113 0f
the network. 1 0f the 3 OPUODS)

Find another supplier of CD-ROMs?
Produce the CD-ROMs internally?

Continue to purchase CD-ROMs from this supplier? __ (Please go to question 23)
2a. Having chosen to continue purchasing from this -3 -2 -1 0 +1 +2 +3
supplier, what level of coordination would you now Decrease Same Increase
recommend for this supplier? Coordination Coordination Coordination
(Please Bold Choice)

 

127

 

Part 4: Your supplier network

 

If the supplier of CD-ROMs unexpectedly begins to supply CD-ROMs to a new customer, what response
would you recommend based on your supplier network characteristics?

 

3. You and your suppliers have extensive ties with each

other and communicate frequently. (Please place “X” on line 0f
1 of the 3 options)

Find another supplier of CD-ROMs? _ (Please go to question 4)
Produce the CD-ROMs internally? _ (Please go to question 4)
Continue to purchase CD-ROMs ﬁ'om this supplier? __ (Please go to question 3a)

3a. Having chosen to continue purchasing from this -3 -2 -l 0 +1 +2 +3
supplier, what level of coordination would you now Decrease Same Increase
recommend for this supplier? Coordination Coordination Coordination

(Please Bold Choice)

4. You and your suppliers have limited ties with each other

and communicate infrequently. (Please place “X” 911 line 0f
1 of the 3 options)

Find another supplier of CD-ROMs?

Produce the CD-ROMs internally?

Continue to purchase CD-ROMs from this supplier? _ (Please go to question 4a)
4a. Having chosen to continue purchasing from this -3 -2 -1 0 +1 +2 +3
supplier, what level of coordination would you now Decrease Same Increase
recommend for this supplier? Coordination Coordination Coordination
(Please Bold Choice)

 

128

Appendix 8
Script for Buyer Asset Speciﬁcity High

and Density (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

129

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

You have been able to accurately measure prices and delivery

performance of this supplier easily.

The technology changes slowly and it is easy to forecast requirements.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

And, you have made significant investments specifically with this supplier.
Based on these conditions, on a scale of 1 to 7, where l is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
Your network of suppliers is very cohesive with extensive interaction amongst the
suppliers.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:

130

Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

Your network of suppliers is not very cohesive with no interaction amongst suppliers.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives ﬁ'om this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. 1 just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

131

Appendix 9
Script for Buyer Asset Specificity Low

and Density (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario.

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

132

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

You have been able to accurately measure prices and delivery

performance of this supplier easily.

The technology changes slowly and it is easy to forecast requirements.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

And, you have made few investments specifically with this supplier.
Based on these conditions, on a scale of l to 7, where l is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
Your network of suppliers is very cohesive with extensive interaction amongst the
suppliers.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:

133

Since you are going to continue purchasing ﬁom this supplier, on a scale
of negative 5 to positive 5, where O is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

Your network of suppliers is not very cohesive with no interaction amongst suppliers.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

134

Appendix 10
Script for Buyer Asset Speciﬁcity High

and Centrality (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, ﬁrture market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario.

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

135

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

You have been able to accurately measure prices and delivery

performance of this supplier easily.

The technology changes slowly and it is easy to forecast requirements.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

And, you have made significant investments specifically with this supplier.
Based on these conditions, on a scale of l to 7, where 1 is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
The supplier’s new customer is a competitor and maintains many ties with other
organizations within the industry.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:

136

Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where O is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of

coordination would you recommend for the CD-ROM drive supplier?

The supplier’s new customer is not a competitor and maintains few ties with other

organizations within the industry.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

137

Appendix 11
Script for Buyer Asset Speciﬁcity Low

and Centrality (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

138

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

You have been able to accurately measure prices and delivery

performance of this supplier easily.

The technology changes slowly and it is easy to forecast requirements.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

And, you have made few investments specifically with this supplier.
Based on these conditions, on a scale of l to 7, where 1 is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a— Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
The supplier’s new customer is a competitor and maintains many ties with other
organizations within the industry.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:

139

Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of

coordination would you recommend for the CD-ROM drive supplier?

The supplier’s new customer is not a competitor and maintains few ties with other

organizations within the industry.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives ﬁ'om this supplier is chosen:
Since you are going to continue purchasing ﬁ'om this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

140

Appendix 12
Script for Buyer Behavioral Uncertainty High

and Density (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. 1 am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

141

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

The technology changes slowly and it is easy to forecast requirements.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

You have made few investments speciﬁcally with this supplier.

And, you have been unable to accurately measure prices and delivery

performance of this supplier easily.
Based on these conditions, on a scale of 1 to 7, where 1 is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
Your network of suppliers is very cohesive with extensive interaction amongst the
suppliers.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:

142

Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where O is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

Your network of suppliers is not very cohesive with no interaction amongst suppliers.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives ﬁom this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

143

Appendix 13
Script for Buyer Behavioral Uncertainty Low

and Density (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

144

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

The technology changes slowly and it is easy to forecast requirements.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

You have made few investments speciﬁcally with this supplier.

And, you have been able to accurately measure prices and delivery

performance of this supplier easily.
Based on these conditions, on a scale of l to 7, where 1 is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
Your network of suppliers is very cohesive with extensive interaction amongst the
suppliers.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives ﬁom this supplier is chosen:

145

Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

Your network of suppliers is not very cohesive with no interaction amongst suppliers.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:
Since you are going to continue purchasing ﬁom this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

146

Appendix 14
Script for Buyer Demand Uncertainty High

and Density (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

147

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

You have been able to accurately measure prices and delivery

performance of this supplier easily.

The technology changes slowly and it is easy to forecast requirements.

You have made few investments speciﬁcally with this supplier.

And, the demand for your computers varies continually and it is diﬂicult to

forecast production volumes for your supplier.
Based on these conditions, on a scale of 1 to 7, where l is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier aﬁer the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
Your network of suppliers is very cohesive with extensive interaction amongst the
suppliers.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:

148

Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

Your network of suppliers is not very cohesive with no interaction amongst suppliers.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

149

Appendix 15
Script for Buyer Demand Uncertainty Low

and Density (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 rrrinutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may reﬁrse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

150

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

You have been able to accurately measure prices and delivery

performance of this supplier easily.

The technology changes slowly and it is easy to forecast requirements.

You have made few investments speciﬁcally with this supplier.

And, the demand for your computers is steady and it is easy to forecast

production volumes for your supplier.
Based on these conditions, on a scale of 1 to 7, where 1 is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
Your network of suppliers is very cohesive with extensive interaction amongst the
suppliers.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:

151

Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

Your network of suppliers is not very cohesive with no interaction amongst suppliers.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

152

Appendix 16
Script for Buyer Technological Uncertainty High

and Density (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

153

You have been frequently purchasing CD—ROM drives from a single

supplier for two years.

You have been able to accurately measure prices and delivery

performance of this supplier easily.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

You have made few investments speciﬁcally with this supplier.

And, technology changes rapidly and it is difficult to forecast

requirements.
Based on these conditions, on a scale of 1 to 7, where 1 is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
Your network of suppliers is very cohesive with extensive interaction amongst the
suppliers.

Of the three actions, which would you recommend?

154

If continue to purchase CD-ROM drives from this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

Your network of suppliers is not very cohesive with no interaction amongst suppliers.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

155

Appendix 17
Script for Buyer Technological Uncertainty Low

and Density (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers
and recommending the level of coordination with your suppliers.
Coordination is deﬁned as the degree of information exchanged between you and your
supplier, and may include information on production costs, market conditions for the end
product, future market strategies, and joint efforts in product development and quality
control.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

156

You have been frequently purchasing CD—ROM drives ﬁ'om a single

supplier for two years.

You have been able to accurately measure prices and delivery

performance of this supplier easily.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

You have made few investments speciﬁcally with this supplier.

And, technology changes slowly and it is easy to forecast requirements.
Based on these conditions, on a scale of 1 to 7, where 1 is very limited coordination and 7
is very extensive coordination, how much coordination would you recommend with this
supplier?
Keeping these conditions in mind, in this next section, I will read two statements
regarding the level of coordination you would recommend with your CD-ROM drive
supplier after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network. For each of the two statements please
recommend one of the following three actions.

a- Find another supplier of CD-ROM drives.

b- Produce the CD-ROM drives internally.

c- Continue to purchase CD-ROM drives from this supplier.
Your network of suppliers is very cohesive with extensive interaction amongst the
suppliers.
Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:

157

Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

Your network of suppliers is not very cohesive with no interaction amongst suppliers.

Of the three actions, which would you recommend?

If continue to purchase CD-ROM drives from this supplier is chosen:
Since you are going to continue purchasing from this supplier, on a scale
of negative 5 to positive 5, where 0 is recommend the same level of
coordination, negative 5 is extremely decrease, and positive 5 is extremely
increase the level of coordination with the supplier, what level of
coordination would you recommend for the CD-ROM drive supplier?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

158

Appendix 18
Script for Buyer Behavioral Uncertainty High

and Centrality (Within Subjects)lTreatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers.
Keep in mind, all your responses are conﬁdential and you may reﬁrse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

The technology changes slowly and it is easy to forecast requirements.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

You have made few investments speciﬁcally with this supplier.

159

And, you are unable to accurately measure prices and delivery

performance of this supplier easily.
Based on these conditions, on a scale of l to 7, where 1 is very uncertain and 7 is very
certain, what is your certainty in the supplier complying with the purchase agreement?
Keeping these conditions in mind, in this next section, I will read you two statements
regarding your certainty in the CD-ROM drive supplier complying with the purchase
agreement after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network.
The supplier’s new customer is a competitor and maintains many ties with other
organizations within the industry.

On a scale of negative 5 to positive 5, where 0 is neither deceases or

increases your certainty in the supplier complying with the purchase

agreement, negative 5 is very likely decreases, and positive 5 is very likely

increases your certainty in the supplier complying with the purchase

agreement, what is your certainty in the supplier complying with the

purchase agreement?
The supplier’s new customer is not a competitor and maintains few ties with other
organizations within the industry.

On a scale of negative 5 to positive 5, where O is neither deceases or

increases your certainty in the supplier complying with the purchase

agreement, negative 5 is very likely decreases, and positive 5 is very likely

increases your certainty in the supplier complying with the purchase

160

agreement, what is your certainty in the supplier complying with the
purchase agreement?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

161

Appendix 19
Script for Buyer Behavioral Uncertainty Low

and Centrality (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers.
Keep in mind, all your responses are conﬁdential and you may reﬁrse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

You have been frequently purchasing CD-ROM drives from a single

supplier for two years.

The technology changes slowly and it is easy to forecast requirements.

The demand for your computers is steady and it is easy to forecast

production volumes for your supplier.

You have made few investments speciﬁcally with this supplier.

162

And, you are able to accurately measure prices and delivery performance

of this supplier easily.
Based on these conditions, on a scale of 1 to 7, where l is very uncertain and 7 is very
certain, what is your certainty in the supplier complying with the purchase agreement?
Keeping these conditions in mind, in this next section, I will read you two statements
regarding your certainty in the CD-ROM drive supplier complying with the purchase
agreement after the supplier unexpectedly adds a new customer that has previously not
worked with any suppliers in your network.
The supplier’s new customer is a competitor and maintains many ties with other
organizations within the industry.

On a scale of negative 5 to positive 5, where 0 is neither deceases or

increases your certainty in the supplier complying with the purchase

agreement, negative 5 is very likely decreases, and positive 5 is very likely

increases your certainty in the supplier complying with the purchase

agreement, what is your certainty in the supplier complying with the

purchase agreement?
The supplier’s new customer is not a competitor and maintains few ties with other
organizations within the industry.

On a scale of negative 5 to positive 5, where 0 is neither deceases or

increases your certainty in the supplier complying with the purchase

agreement, negative 5 is very likely decreases, and positive 5 is very likely

increases your certainty in the supplier complying with the purchase

163

agreement, what is your certainty in the supplier complying with the
purchase agreement?

That concludes the scenario. I just need some background information.

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?

How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

164

Appendix 20
Script for Buyer Demand Uncertainty High

and Centrality (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

You have been ﬁequently purchasing CD-ROM drives from a single

supplier for two years.

You are able to accurately measure prices and delivery performance of

this supplier easily.

Technology changes slowly and it is easy to forecast requirements.

You have made few investments speciﬁcally with this supplier.

165

And, the demand for your computers varies continually and it is difficult to

forecast production volumes for your supplier.
Based on these conditions, on a scale of 1 to 7, where 1 is very uncertain and 7 is very
certain, what is your certainty in predicting future demand for your computers?
Keeping these conditions in mind, in this next section, I will read you two statements
regarding your certainty in predicting ﬁrture demand for your computers after the CD-
ROM drive supplier unexpectedly adds a new customer that has previously not worked
with any suppliers in your network.
The supplier’s new customer is a competitor and maintains many ties with other
organizations within the industry.

On a scale of negative 5 to positive 5, where 0 is neither deceases or

increases your certainty in predicting ﬁrture demand for your computers,

negative 5 is very likely decreases, and positive 5 is very likely increases

your certainty in predicting future demand for your computers, what is

your certainty in predicting future demand for your computers?
The supplier’s new customer is not a competitor and maintains few ties with other
organizations within the industry.

On a scale of negative 5 to positive 5, where 0 is neither deceases or

increases your certainty in predicting future demand for your computers,

negative 5 is very likely decreases, and positive 5 is very likely increases

your certainty in predicting future demand for your computers, what is

your certainty in predicting future demand for your computers?

That concludes the scenario. I just need some background information.

166

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?
How many suppliers do you work with?

What is the principle product that you manufacture?

How many people are employed by your company?

167

Appendix 21
Script for Buyer Demand Uncertainty Low

and Centrality (Within Subjects) Treatment

Hello, Mr. /Ms. , my name is Wes Pollitte. I am a doctoral student at Michigan
State University.
I am conducting research for my dissertation on buyer-supplier relationships and I am
contacting supply chain professionals like yourself, and I was wondering if you would
you be willing to spend 5 minutes to answer some questions?
I will read a scenario where you will assume the position of a supply chain manager for a
computer manufacturer with responsibility for the management of a network of suppliers.
Keep in mind, all your responses are conﬁdential and you may refuse to answer any
questions.
Here is the scenario:

Imagine you are a supply chain manager responsible for acquiring CD-

ROM drives for a leading manufacturer of computers.

While there are multiple qualiﬁed suppliers of CD-ROM drives in the

market,

You have been frequently purchasing CD—ROM drives from a single

supplier for two years.

You are able to accurately measure prices and delivery performance of

this supplier easily.

Technology changes slowly and it is easy to forecast requirements.

You have made few investments speciﬁcally with this supplier.

168

And, the demand for your computers is steady and it is easy to forecast

production volumes for your supplier.
Based on these conditions, on a scale of l to 7, where 1 is very uncertain and 7 is very
certain, what is your certainty in predicting future demand for your computers?
Keeping these conditions in mind, in this next section, I will read you two statements
regarding your certainty in predicting future demand for your computers after the CD-
ROM drive supplier unexpectedly adds a new customer that has previously not worked
with any suppliers in your network.
The supplier’s new customer is a competitor and maintains many ties with other
organizations within the industry.

On a scale of negative 5 to positive 5, where 0 is neither deceases or

increases your certainty in predicting future demand for your computers,

negative 5 is very likely decreases, and positive 5 is very likely increases

your certainty in predicting future demand for your computers, what is

your certainty in predicting future demand for your computers?
The supplier’s new customer is not a competitor and maintains few ties with other
organizations within the industry.

On a scale of negative 5 to positive 5, where 0 is neither deceases or

increases your certainty in predicting future demand for your computers,

negative 5 is very likely decreases, and positive 5 is very likely increases

your certainty in predicting future demand for your computers, what is

your certainty in predicting future demand for your computers?

That concludes the scenario. I just need some background information.

169

Background Information

Company name

What is your position?

How many years have you worked in supply chain management?
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What is the principle product that you manufacture?

How many people are employed by your company?

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214

Table 2

Network Categories and Examples of Research

 

 

Network Category Function Examples of Research

Vertical networks Maximize the productivity of Wathne and Heide (2004)
serially dependent functions by Wuyts, Stremersch, Van Den Bulte,
creating partnerships among and F ranses (2004)
independent skill-specialized J oshi and Campbell (2003)

Internal networks

Intermarket network

Opportunity network

ﬁrms

Designed to reduce hierarchy
and open fums to their
environments

Seek to leverage horizontal
synergies across industries

Organized around customer
needs and market opportunities
and designed to search for the
best solutions

Wathne, Biong, and Heide (2001)
Kale, Singh, and Perlmutter (2000)

Day (1994)
J aworski and Kohli (1993)
Kohli and Jaworski (1990)

Dyer (1996a)
Dyer (1996b)
Dyer and Nobeoka (2000)

Frels, Shervani, and Srivastava
(2003)

McEvily and Zaheer (1999)
Rindﬂeisch and Moorman (2001)

 

215

 

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220

Table 4

Pre-Test Results of Transaction Cost Economics and Control Variables

 

TCE Variable Treatment Mean N t-value p-value

Buyer Asset Speciﬁcity High 5.67 18 6.27 < .001
Low 2.94

Buyer Performance Ambiguity High 5.28 18 6.06 < .001
Low 3.39

Buyer Demand Uncertainty High 5.83 18 13.97 < .001
Low 3.11

Buyer Technological Uncertainty High 6.00 18 9.95 < .001
Low 3.1 1

Control Variable

Market Position High 5.33 18 0.22 NS
Low 5.22

Number of Suppliers High 3.67 18 -12.47 < .001
Low 6.33

Qualiﬁed Suppliers in market High 3.5 16* -7.30 < .001
Low 5.50

Purchase Frequency High 4.39 18 3.06 < .01
Low 3.22

 

* Two returned surveys had missing data

221

 

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REFERENCES

231

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Marketing Science, 25 (1), 56-71.

---- (1991), "Evolution of the Marketing Organization: New Forms for Turbulent
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Achrol, Ravi S. and Gregory T. Gundlach (1999), "Legal and Social Safeguards
Against Opportunism in Exchange," Journal of Retailing, 75 (1), 107-124.

Achrol, Ravi S. and Philip Kotler (1999), "Marketing in the Network Economy, "
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Adler, Paul S. and Seok-Woo Kwon (2002), "Social Capital: Prospects for a New
Concept," The Academy of Management Review, 27 (1), 17-40.

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