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Supplier Performance in Vertical Alliances: The Effects of Self-Enforcing Agreements and Enforceable Contracts

Author

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  • Raji Srinivasan

    (School of Business, University of South Dakota, Vermillion, South Dakota 57069)

  • Thomas H. Brush

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47906)

Abstract

The paper examines the significance of enforceability and adaptability in governing vertical alliances and their performance ramifications for suppliers. Literature on supplier relations suggests that suppliers are skeptical of close ties with their buyers (Helper 1991, Helper and Sako 1995). Such skepticism persists in spite of the fact that buyers are writing longer (enforceable) contracts with fewer suppliers. In this context, the paper develops a transaction cost economics (TCE)-based model that distinguishes between the verifiable and nonverifiable aspects of governance attributes (of safeguards, incentive intensity, and adaptability) in explaining supplier performance variations. The paper argues that the following factors prove valuable for suppliers: (1) the adaptive and collaborative orientation fostered by the original equipment manufacturer’s (OEM’s) credible commitment to the exchange and by information sharing on the part of the supplier, (2) the presence of certain nonverifiable safeguards, and (3) the incentives inherent in target pricing. These assertions have been tested using data from the home appliance industry. Results indicate that information sharing together with (1) OEM dependence and (2) target pricing does indeed enhance supplier performance. Also, results suggest that while nonverifiable safeguards can help, verifiable safeguards do not have a positive association with supplier interests. Under certain conditions then, suppliers can venture into closer relationships with buyers and benefit.

Suggested Citation

  • Raji Srinivasan & Thomas H. Brush, 2006. "Supplier Performance in Vertical Alliances: The Effects of Self-Enforcing Agreements and Enforceable Contracts," Organization Science, INFORMS, vol. 17(4), pages 436-452, August.
    • Handle: RePEc:inm:ororsc:v:17:y:2006:i:4:p:436-452
    DOI: 10.1287/orsc.1060.0194
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    6. Li, Peter Ping, 2010. "Toward a learning-based view of internationalization: The accelerated trajectories of cross-border learning for latecomers," Journal of International Management, Elsevier, vol. 16(1), pages 43-59, March.
    7. Mahka Moeen & Deepak Somaya & Joseph T. Mahoney, 2013. "Supply Portfolio Concentration in Outsourced Knowledge-Based Services," Organization Science, INFORMS, vol. 24(1), pages 262-279, February.
    8. Nina Shin & Sun Hyun Park & Sangwook Park, 2019. "Partnership-Based Supply Chain Collaboration: Impact on Commitment, Innovation, and Firm Performance," Sustainability, MDPI, vol. 11(2), pages 1-19, January.
    9. Kang, Min-Ping & Mahoney, Joseph T. & Tan, Danchi, 2007. "Why Firms Make Unilateral Investments Specific to Other Firms: The Case of OEM Suppliers," Working Papers 07-0110, University of Illinois at Urbana-Champaign, College of Business.
    10. Sokolovskyi, Dmytro, 2017. "Gaming modeling of self-enforcing agreements and free-rider problem," MPRA Paper 80818, University Library of Munich, Germany.
    11. Robert Swinney & Serguei Netessine, 2009. "Long-Term Contracts Under the Threat of Supplier Default," Manufacturing & Service Operations Management, INFORMS, vol. 11(1), pages 109-127, September.
    12. Della Corte, Valentina & Aria, Massimo, 2014. "Why strategic networks often fail: Some empirical evidence from the area of Naples," Tourism Management, Elsevier, vol. 45(C), pages 3-15.
    13. Filipe Coelho & Carlos Sousa, 2011. "From Goal Orientations to Employee Creativity and Performance: Evidence from Frontline Service Employees," GEMF Working Papers 2011-08, GEMF, Faculty of Economics, University of Coimbra.
    14. Kolloge, Konstantin, 2009. "Die Messung des Kooperationserfolges in der empirischen Forschung: Ergebnisse einer Literaturstudie," Arbeitspapiere 76, University of Münster, Institute for Cooperatives.
    15. Sergio G. Lazzarini & Danny P. Claro & Luiz F. Mesquita, 2008. "Buyer–Supplier and Supplier–Supplier Alliances: Do They Reinforce or Undermine One Another?," Journal of Management Studies, Wiley Blackwell, vol. 45(3), pages 561-584, May.
    16. Moeen, Mahka & Somaya, Deepak & Mahoney, Joseph T., 2011. "Supply Portfolio Concentration in Outsourced Knowledge-Based Services," Working Papers 11-0106, University of Illinois at Urbana-Champaign, College of Business.
    17. Lijun Angelia Chen & Bruno Varella Miranda & Joe L. Parcell & Chao Chen, 2019. "The foundations of institutional-based trust in farmers’ markets," Agriculture and Human Values, Springer;The Agriculture, Food, & Human Values Society (AFHVS), vol. 36(3), pages 395-410, September.
    18. Kretschmer, Tobias & Banal-Estanol, Albert & Seldeslachts, Jo & Meloso, Debrah, 2017. "The Contingent Effect of Alliance Design on Alliance Dynamics and Performance: An Experimental Study," CEPR Discussion Papers 12512, C.E.P.R. Discussion Papers.
    19. David Souder & Greg Reilly & Philip Bromiley & Scott Mitchell, 2016. "A Behavioral Understanding of Investment Horizon and Firm Performance," Organization Science, INFORMS, vol. 27(5), pages 1202-1218, October.
    20. Africa Ariño & Jeffrey J. Reuer & Kyle J. Mayer & Juan Jané, 2014. "Contracts, Negotiation, and Learning: An Examination of Termination Provisions," Journal of Management Studies, Wiley Blackwell, vol. 51(3), pages 379-405, May.
    21. Laura Poppo & Kevin Zheng Zhou & Todd R. Zenger, 2008. "Examining the Conditional Limits of Relational Governance: Specialized Assets, Performance Ambiguity, and Long‐Standing Ties," Journal of Management Studies, Wiley Blackwell, vol. 45(7), pages 1195-1216, November.
    22. Kyung Yun Hwang & Eul Hyun Sung & Temitayo Shenkoya, 2022. "The Mediating and Combined Effects of Trust and Satisfaction in the Relationship between Collaboration and the Performance of Innovation in Industry—Public Research Institute Partnerships," Sustainability, MDPI, vol. 14(4), pages 1-18, February.
    23. Slater, Stephanie & Robson, Matthew J., 2012. "Cultural interpretations of destructive acts and trust in Japanese supply channel relationships," International Business Review, Elsevier, vol. 21(3), pages 357-368.

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