Long-term vertical alliances and supplier performance

In recent years, cooperative buyer-supplier relationships, fashioned after the Japanese management style, have become popular in industrial markets. While buyers have explicitly benefited (from these relationships) in terms of better end-product performance and lower costs, it is not clear if suppliers have also gained. Researchers wonder if the buyers\u27 success has come at the expense of their suppliers. To this end, this dissertation attempts to study the effect of the structural attributes of long-term vertical relations on supplier performance. Given that a long-term vertical relationship (that warrants transaction specific investments—TSIs) is the focus of analysis, the dissertation draws on two related fields of study—Transaction Cost Economics (TCE) and Theory of Incomplete Contracts. The former theory stipulates that TSIs need to be accompanied by safeguard mechanisms to serve efficiency interests of both parties. It further characterizes governance structures (for exchange relationships) along the dimensions of incentive intensity and adaptive ability. Among other factors, the latter theory focuses on “verifiability of contractual provisions” as a key source of incompleteness and rigidity in long term contracts. This dissertation synthesizes these two contributions to distinguish between “enforceable contracts” that require verifiable provisions and “self-enforcing contracts” that are supported by symbiotic, but non-verifiable mechanisms. The study argues that these two governance modes would vary systematically in terms of their safeguards, incentive intensity and adaptive features, and would therefore impact supplier performance differently. A total of nine hypotheses, all concerning supplier performance, are developed. These propositions are tested in the context of data collected from the Home Appliance Industry. Results from the study suggest that supplier management characterized by reciprocal investments, mutual dependence, and information sharing is a value enhancing capability. Results also indicate that merely increasing contract duration is not sufficient to serve supplier interests. Interestingly, this is not the approach taken by most American OEMs in their dealings with suppliers. In this context, this dissertation should add to our understanding of how to structure long-term OEM-Supplier relationships in ways that lead to improved performance for suppliers and sustainable advantage for OEMs