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

Author

Listed:
  • 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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    References listed on IDEAS

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    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
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    11. 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.
    12. 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.
    13. 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.
    14. Sergio G. Lazzarini & Gary J. Miller & Todd R. Zenger, 2008. "Dealing with the Paradox of Embeddedness: The Role of Contracts and Trust in Facilitating Movement Out of Committed Relationships," Organization Science, INFORMS, vol. 19(5), pages 709-728, October.
    15. Sabari R. Prasanna, 2022. "The role of supplier innovativeness in the humanitarian context," Annals of Operations Research, Springer, vol. 319(1), pages 1359-1377, December.
    16. Han,I & Chuang, Cheng-Min, 2014. "Spatial and Temporal Dimensions of Collaborative Interfirm Relationships in the Taiwanese Rice Industry," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 10(1), pages 27-48, January.
    17. 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.
    18. Sokolovskyi, Dmytro, 2017. "Gaming modeling of self-enforcing agreements and free-rider problem," MPRA Paper 80818, University Library of Munich, Germany.
    19. 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.
    20. 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.
    21. Kolloge, Konstantin, 2009. "Die Messung des Kooperationserfolges in der empirischen Forschung: Ergebnisse einer Literaturstudie," Arbeitspapiere 76, University of Münster, Institute for Cooperatives.
    22. 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.
    23. 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.

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