The Relationship Between a Firm’s Efforts to Develop Deficient Suppliers and Competitive Advantage By Stephan M. Wagner, Ph.D. WHU-Otto Beisheim Graduate School of Management ISBM Report 12-2005 Institute for the Study of Business Markets The Pennsylvania State University 402 Business Administration Building University Park, PA 16802-3004 (814) 863-2782 or (814) 863-0413 Fax The Relationship Between a Firm’s Efforts to Develop Deficient Suppliers and Competitive Advantage STEPHAN M. WAGNER WHU – Otto Beisheim Graduate School of Management Chair of Logistics Management Burgplatz 2 56179 Vallendar, Germany Phone: +49 261 6509-430 Fax: +49 261 6509-439 Email: stephan.wagner@whu.edu ISBM Working Paper Series January 22, 2005 1 The Relationship Between a Firm’s Efforts to Develop Deficient Suppliers and Competitive Advantage Abstract Supplier development involves the customer firm’s support of a deficient supplier in a channel. This research examines the relationship between supplier development, supplier firm improvement and the support of the customer firm’s competitive advantage. Results largely conform to expectations. When the appropriate supplier development activities are undertaken, the customer firm substantially backs up a differentiation as well as a cost leadership strategy. Supplier development activities focusing on supplier capability improvement have the strongest impact on both generic competitive strategies. Furthermore, firms should stay away from combining direct and indirect supplier development measures. Overall, this study underlines that supplier development is powerful. Supplier development in channel research is a widely neglected interfirm relationship management practice. 2 The Relationship Between a Firm’s Efforts to Develop Deficient Suppliers and Competitive Advantage 1. Introduction Firms in most industries have more and more focused on their core competencies and outsourced products and activities that were previously considered integral to the firm. Several studies have reported that industrial firms spend up to 60 or even 70% of their budget to suppliers for purchased materials (Chapman, Dempsey, Ramsdell, and Reopel 1997; Heberling, Carter, and Hoagland 1992). The trend towards outsourcing is tied in with the necessity to access and exploit specialized competencies residing in the supplier network (Dyer and Nobeoka 2000; Mowery, Oxley, and Silverman 1996). Suppliers may possess superior technological, manufacturing or logistics competencies. One approach firms pursue to access these technological competencies is to extend new product development activities and integrate internal company resources with those of their key suppliers (Fritsch and Lukas 2001; Von Hippel 1988). Another approach to utilize suppliers’ competence in the agile manufacturing and delivery of products is to set up justin-time exchange relationships. In just-in-time relationships, the frequent exchange of joint product-, production- and logistics-related information allows for the flexible and reliable shipment of exact quantities and ensures that the buying firm’s production processes run uninterrupted (Frazier, Spekman, and O’Neal 1988; Waters-Fuller 1995). High flexibility in the supplier network can help firms to cope with uncertain and dynamic market environments and customer needs. As a result, in order to identify and realize significant cost savings or added customer value, firms have to work through suppliers and can no longer limit such efforts to their firm boundaries. Put differently, firms increasingly have to rely on their suppliers’ contributions to accomplish strategic ends and create competitive advantage. 3 Business marketing and marketing channel research has extensively explored how competent suppliers and the management of relationships with such suppliers can boost the buying firm’s performance and can contribute to the accomplishment of strategic goals and the creation of competitive advantage. Most research in this area addresses factors and antecedents of buyersupplier relationships, such as cooperative norms (Anderson and Narus 1990; Heide and John 1992), trust and commitment (Anderson and Weitz 1992; Doney and Cannon 1997), information exchange and communication (Mohr and Nevin 1990; Mohr and Sohi 1995) or dependence and safeguarding of relationship-specific investments (Buvik and Reve 2001; Heide and John 1988). Furthermore, the outcomes of buyer-supplier relationship characteristics and collaborative processes (i.e., collaborative product development) on key performance outcomes of the firm (Jap 1999; Johnson 1999; Noordewier, John, and Nevin 1990) and the supplier (Kalwani and Narayandas 1995; LaBahn and Krapfel 1999) have been investigated. In sum, the impact of suppliers and supplier relationship management on strategic goals, competitive advantage, and performance has received substantial research attention. However, very little is known about the impact of firms’ supplier development efforts. In other words, while the facilitating conditions for performance improvements and contributions to competitive advantage through the collaboration with capable suppliers has been studied, no one has asked the ensuing question: How does the development of deficient suppliers support firms in the creation of competitive advantage? Motivated by this question, the objective of this study is to contribute to the business marketing and supply chain management literature by providing new insights about the effect of supplier development practices on (1) the supplier’s product and delivery performance, (2) the supplier’s capabilities, and (3) the customer firm’s competitive advantage. 4 To achieve this objective, the second section draws on current supplier development, supplier relationship management and marketing strategy literatures as foundations for the proposed conceptual model. In particular, hypotheses regarding the effect of supplier development practices on the suppliers’ product and delivery performance and capabilities and their effect on the customer firms’ competitive advantage are developed. Section 3 describes the empirical study in which these effects were tested. The results of the data analysis are presented in Section 4. The article concludes with a discussion of the results and managerial implications. 2. Conceptual background and hypotheses 2.1. Supplier development In situations when firms are forced to upgrade the delivery performance or quality of goods or services (for brevity, hereafter the term “product” is used to refer to both goods as well as services) provided by a supplier in order to regain or sustain competitiveness on the market, they can principally follow one of three avenues. The first option is to switch the supplier, i.e. to search for alternative sources of supply and source the product from a more capable supplier (Demski, Sappington, and Spiller 1987; Sambandam and Lord 1995). This option, however, might not be viable if alternative suppliers are not available or if switching costs are excessively high. Second, through vertical integration the firm can bring the needed product in-house by acquiring the supplier or setting up capacities to turn out the product internally (Langlois and Robertson 1989; Monteverde and Teece 1982). Vertical integration might require substantial investments and be in contradiction to the firms’ intention to focus on their core competencies and outsource non-core activities. The third option is to assist the deficient supplier so that the supplier’s performance or the supplier’s capabilities are upgraded to the desired level. 5 Supplier development has been defined as “a long-term cooperative effort between a buying firm and its suppliers to upgrade the suppliers’ technical, quality, delivery, and cost capabilities and to foster ongoing improvements” (Watts and Hahn 1993, p. 12), or likewise, as “any effort of a buying firm with its supplier to increase the performance and/or capabilities of the supplier and meet the buying firm’s supply needs.” (Krause and Ellram 1997a, p. 21). In essence, supplier development can aim at improving the product sourced from a supplier and/or at capabilities of the deficient supplier as classified by Day (1994) in the hope that underlying processes of the supplier which are critical for the customer firm are upgraded as a result of the customer firm’s supplier development effort. Recognizing the long-term and strategic benefits of supplier development, many companies have established supplier development programs and teams in recent years. John Deere, for example, relies on a systematic supplier development approach to upgrade suppliers’ just-in-time capabilities. Working with John Deere’s supplier development teams, suppliers were able to achieve dramatic cycle time reductions (Golden 1999). The BP (“Best Practice, Best Process, and Best Performance”) supplier development program of Honda of America performed by a dedicated supplier development group supports suppliers in adopting the Kaizen philosophy for continuous improvement and organizational change (MacDuffie and Helper 1997). Through consulting and problem solving teams of Toyota’s Operations Management Consulting Division (OMCD) in Japan and the Toyota Supplier Support Center (TSSC) in the United States, a large number of suppliers has received assistance from Toyota in building up lean manufacturing capabilities. These organizational capabilities benefited the suppliers and Toyota on the long run (Dyer and Nobeoka 2000; Sako 1999). Other examples are the Kaizen seminars of Porsche (with support of consultants from Porsche Consulting), the PICOS (Purchased Input Concept 6 Optimization with Suppliers) program of General Motors, or the Allen Bradley HPM (High Performance Manufacturing) supplier consortium. Although, the authors of these prominent examples report substantial performance improvements and claim positive relationships between supplier development programs and the firms’ competitiveness, all studies were of qualitative nature, limiting the generalizability of the findings. In addition, the dominance of these firms in their supply chains, their size and channel power may not be representative. This present research overcomes these drawbacks by operationalizing a supplier development model and statistically testing effects on supplier improvement and the customer firms’ competitive advantage with a sample of firms from various industries and of different sizes. A firm’s efforts to develop suppliers with the aim to achieve positive outcomes for its own competitiveness is a two-stage process. First, the firm performs supplier development activities, resulting in supplier firm improvements. The supplier will be able to deliver products of higher quality and with a better delivery performance. Alternatively the customer firm can benefit from enhanced supplier capabilities. Such capabilities are in particular inside-out processes such as manufacturing and transformation processes, and spanning processes such as customer service delivery or customer order fulfillment (Day 1994). A higher level of delivery performance and capabilities, in turn, will positively influence the customer firm’s attainment of competitive advantage. Figure 1 depicts the supplier development framework underlying this paper. The hypotheses pertaining to this framework are developed next. 2.2. Effects of supplier development activities on supplier improvement An important distinction of supplier development activities concerns the role of the buying firm in terms of the resources committed to a supplier. In case of “direct” (also called “internalized”) supplier development, the buying firm plays an active role and dedicates human and/or capital 7 resources to a specific supplier (Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan 1993). From a transaction cost perspective, direct supplier development stands for a transaction-specific investment by the buying firm (Williamson 1991). Besides the provision of equipment or capital, direct supplier development includes mainly activities such as on-site consultation, education and training programs, temporary personnel transfer, inviting supplier’s personnel, taken as a whole, the transfer of knowledge and qualifications into the supplier’s organization (Krause 1997; Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan 1993). For a supplier in general, and a deficient supplier in particular, the customer firm can be a crucial outside source of valuable knowledge which can help the supplier in implementing measures to upgrade its engineering, logistics, manufacturing and other capabilities on the long run, or to immediately improve the production and delivery of a particular product. Several authors have hinted to the fact that suppliers can greatly benefit that way if they are able to integrate such external knowledge (Dyer and Nobeoka 2000; Kogut 2000). Others have hinted to the critical role of direct supplier development for achieving performance and capability improvements (Krause, Scannell, and Calantone 2000). Thus, if firms engage in direct supplier development with deficient suppliers, they can expect an improvement of these suppliers’ capabilities and their product and delivery performance. We hypothesized: H1: There is a positive relationship between the customer firm’s direct supplier development activities and the supplier firm’s capabilities. H2: There is a positive relationship between the customer firm’s direct supplier development activities and the supplier firm’s product and delivery performance. 8 Contrary to direct supplier development, the buying firm commits no or only limited resources to a specific supplier in case of “indirect” (also called “externalized”) supplier development (Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan 1993). Instead, the firm offers incentives or enforces suppliers to improve, hence, makes use of the external market to encourage performance improvement. This is frequently done by assessing suppliers, communicating supplier evaluation results and performance goals, increasing a supplier’s performance goals, instilling competition by the use of multiple sources or promising future business (Krause 1997; Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan 1993; Prahinski and Benton 2004). As there is no active involvement of the buying firm. Know-how transfer from the buying firm to the supplier does not occur, i.e. the supplier will not be able to upgrade its capabilities or organizational processes. However, if the supplier wants to maintain business with the customer firm, measures of indirect supplier development will compel the supplier to put additional efforts (time, labor, quality inspection, input material of higher quality etc.) in the production and delivery of the product. This can happen without an upgrade of critical capabilities. Therefore, while indirect supplier development can be associated with an improved product and delivery performance, we do not expect an improvement of the supplier’s capabilities. We hypothesize: H3: There is a positive relationship between the customer firm’s indirect supplier development activities and the supplier firm’s product and delivery performance. A few empirical studies indicate that firms in corporate practice combine indirect and direct supplier development measures. That is, on the one hand, buying firms utilize the market forces to compel suppliers to improve, and on the other hand they engage actively in the development of the deficient supplier (Krause 1997; Monczka, Trent, and Callahan 1993). In the present study 9 the direct and indirect supplier development constructs are also highly correlated at 0.43 (see Appendix 1). Several authors emphasized that a cooperative buyer-supplier relationship is vital for the success of direct supplier development activities. For example, MacDuffie and Helper (1997, p. 148) conclude from their study of Honda’s supplier development program that “a supplier-customer relationship which generates high motivation for learning and high trust between provider and recipient is a crucial condition” for creating lean suppliers. Likewise, Prahinski and Benton (2004) found, that the buyer-supplier relationship, cooperation, and commitment on both sides are important prerequisites for supplier development programs to be successful. Because the cooperativeness of the buyer-supplier relationship is a key success factor, we question that direct and indirect supplier development efforts should be combined. Indirect measures, such as setting improvement goals or instilling competition among suppliers rather reduce commitment, trust and cooperation. While the previous hypotheses acknowledged that each supplier development strategy (direct and indirect) will work in isolation, we posit that combining these strategies will have a negative impact on supplier firm improvement. Therefore, we hypothesize: H4: The combined effect of direct and indirect supplier development activities results in lower levels of supplier firm capabilities. H5: The combined effect of direct and indirect supplier development activities results in lower levels of supplier firm product and delivery performance. 10 2.3. Effects of supplier improvement on competitive advantage To achieve competitive advantage, the firm must create positive value which equals or exceeds that of competitors. A firm has latitude in deciding which competitive strategy to choose, with equal levels of consumer surplus at equilibrium. Competitive advantage can be obtained by offering superior value to the customer through either unique benefits that offset a higher price or lower prices than competitors for equivalent benefits. As such, both differentiation strategies and cost leadership strategies can lead to sustained competitive advantage, which in turn leads to superior financial performance (Day and Wensley 1988; Hambrick 1983; Porter 1980). The firm’s suppliers can contribute to both, a differentiation as well as a cost leadership strategy. Customer firms pursuing a differentiation strategy can greatly benefit from upgraded supplier capabilities. Upgraded capabilities (e.g., new product development, service development, customer service delivery, customer order fulfillment) which support suppliers to serve their customers in a better way as compared to before the implementation of the supplier development activities will support the customer’s differentiation strategy through high product availability, short delivery times, or high product quality, for example (Day 1994). When suppliers possess superior marketing and technology management capabilities, their product development activities will be more effective and they will be able to turn out more innovative and reliable products with a short time-to-market (Griffin and Hauser 1996; Moorman and Slotegraaf 1999). By exercising such capabilities through organizational processes suppliers will be able to better support their customer’s differentiation strategy. Although, improved supplier capabilities, which are embedded within the supplier organization, have a rather medium- to long-term focus and are likely to sustain over a longer period of time, improving the supplier firm’s delivery performance or quality of a specific product can also have 11 a positive impact on the customer firm’s attainment of a differentiation strategy (more immediate and only short-term) (Hartley and Jones 1997). The customer firm might be able to increase their customers’ satisfaction if a supplier is able to reduce lead times for a product, delivery reliability or product quality, for example. While improved supplier capabilities can substantially assist the customer firm in its attainment of a differentiation strategy, better product and delivery performance can also help (though to a lower degree) firms in the attainment of a differentiation strategy (LaLonde, Cooper, and Noordewier 1988). We hypothesize: H6: There is a positive relationship between the supplier firm’s capabilities and the customer firm’s attainment of a differentiation strategy. H7: There is a positive relationship between the supplier firm’s product and delivery performance and the customer firm’s attainment of a differentiation strategy. Offering of lower prices can in the long run only be supported with lower costs. Because cost of materials account for the major portion of total costs in many industries, material cost reductions and related costs (i.e., inventory costs for purchased materials) are a vital source for cost reductions. Suppliers can also upgrade their cost control capabilities in operations as a result of their customer’s supplier development activities (Day 1994). A recent study has shown that external learning and knowledge transfer among firms and their suppliers upgrades the firms’ manufacturing capabilities and subsequently manufacturing performance (Schroeder, Bates, and Junttila 2002). More efficient manufacturing processes, fewer manufacturing downtimes, better utilization of capacity, or less scrap and rework, for example, will result in lower costs for the 12 product. The supplier can share cost savings with its customer, hence, the customer’s cost leadership strategy is also supported. If suppliers realize improvements in terms of cost reductions in their own processes and products, they can pass a share of these cost reductions on to the customer firm. This might be an incentive for the customer firm to help suppliers to upgrade product and delivery performance or cost reduction capabilities. In a nutshell we hypothesize: H8: There is a positive relationship between the supplier firm’s capabilities and the customer firm’s attainment of a cost leadership strategy. H9: There is a positive relationship between the supplier firm’s product and delivery performance and the customer firm’s attainment of a cost leadership strategy. 3. Research method 3.1. Data collection and sample To test these hypotheses, data were collected through a survey which was administered to industrial and service firms in Germany, Switzerland and Austria. From the 251 targeted firms, the responses of 60 were finally used for this study, accounting for an effective response rate of 23.9%. About 30.9% of the responding firms had an annual sales volume of US$ 100 million or less, 18.2% had between US$ 100 million to US$ 250 million, 21.8% between US$ 250 million and US$ 1 billion, 21.8% between US$ 1 billion and 5 billion and 7.3% of more than US$ 5 billion. The average annual sales volume was US$ 1.56 billion. A wide variety of industrial firms is represented in the sample: electro and electronics (10.0%), high-tech (15.0%), automotive (6.7%), machinery and plant construction (18.3%), construction (6.7%), chemicals and pharmaceuticals (6.7%), food (3.3%), textiles (3.3%), other manufacturing (18.3%). Service 13 firms were in telecommunications (5.0%), banking and insurance (3.3%), and other services (3.3%). Key informants targeted were purchasing or supply chain management executives. These informants are likely to have an overarching, boundary-spanning view of their companies’ supplier development activities (Hallenbeck, Hautaluoma, and Bates 1999; Jemison 1984). The majority of informants included in this sample held titles as head of purchasing (61.7%) and head of supply chain management, logistics or materials management (20.0%). The remainder characterized their position as purchasing or commodity managers (11.7%), head of supplier development, procurement information manager, or quality manager (6.7%). They have worked in this position for 5.3 year and with the firm for 7.0 years on average The firms were asked to answer the questions with respect to one particular supplier development they have carried out. Therefore, the units of analysis in this research are not the buying firms’ supplier development activities in general, instead, the activities performed and results achieved in the development of an individual supplier (“supplier X”). On average, the firms have maintained relationships with the suppliers for about 12 years prior to their development, ranging from 1 to 50 years. Furthermore, from the total of 60 supplier development incidents in our sample, 50 pertain to suppliers delivering products. These products range from printed circuit boards, electronic assemblies, mobile phone handsets, plastics moldings and hydraulic power units to chemicals, flavoring and tomato puree. A total of 10 supplier developments concern suppliers of services, such as logistics services, mechanical processing, electric installation or facility management services. As can be seen, the supplier development activities included in this study cover a broad spectrum of products and services, thus enhancing the robustness and generalizability of the results. 14 3.2. Survey instrument and measures The survey instrument and measures were developed in several stages. First, a preliminary questionnaire was drafted on the basis of the pertinent literature and case studies conducted by the authors in prior research projects. Second, a number of academicians and practitioners commented on the items included in the questionnaire, their relevance, their comprehensibility, as well as the questionnaire format. Third, to further refine the survey instrument, it was pretested through in-depth interviews with purchasing executives from a small number of firms. Again, their comments were incorporated in the final version. Multiple-item measures were used to assess all main constructs on five-point Likert scales. Translated descriptions of the specific measures and items used in this study, descriptive statistics and the correlations of summated composites are included in Appendix 1 and 2. Supplier development was measured in terms of direct and indirect activities. The direct supplier development construct consists of activities where firms invest human and/or capital resources in a specific supplier. Seven items were selected from prior studies which have assigned a range of activities to direct development (Krause 1997; Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan 1993). Principal component factor analysis assigned all of the seven items to one construct factor with satisfactory internal consistency (α = 0.83). The indirect supplier development construct indicates to what extent the buying firms have enforce or encouraged suppliers to improve, without becoming actively involved in the improvement process. It was measured by four items which where also drawn from a list of indirect supplier development activities suggested in prior studies (Krause 1997; Krause, Scannell, and Calantone 2000; Monczka, Trent, and Callahan 1993). Principal component factor analysis assigned all items to a single factor. The scale showed a satisfactory level of reliability with α = 0.78. 15 For the supplier firm improvement constructs, four items measured the improvement of supplier capabilities. The respondents had to evaluate whether the supplier strengthened a variety of critical capabilities (e.g., manufacturing, product development) as a result of the buying firm’s supplier development efforts. Principal component factor analysis assigned all four items to one single factor, and the scale showed reliability which is acceptable for new scales (α = 0.68). Product and delivery performance, the second supplier improvement construct, assesses the bearing of the buying firm’s supplier development efforts on the product and the supplier’s delivery performance – disregarding whether the supplier was able to upgrade skills or competences. From the buying firm’s perspective, the question is, whether it received a product of better quality, or whether the supplier delivered faster and more reliable, for example. This construct, which shows satisfactory reliability (α = 0.81) is based on four items. To capture the impact of supplier firm improvement on the customer firm’s competitive advantage through differentiation, we developed a five item scale based on product and service attributes that potentially contribute to the perceived superiority of a product. These (external oriented) attributes can be based on the product itself, the firm’s marketing approach, the delivery system, or customer service (Dickson and Ginter 1987; Porter 1980). A high score on these items, hence on the differentiation construct, would support the buying firm’s differentiation strategy. Example items used in this study are the reduction of the buying firm’s time-to-market due to supplier improvements or the ability to offer more innovative products. Principal component factor analysis assigned these five items to a single factor. The scale showed satisfactory reliability (α = 0.86). Similarly, cost leadership measures the degree to which the firm’s cost leadership strategy is supported due to supplier improvements. Items supporting such a strategy emphasize cost reductions from all (predominantly internal) sources and by performing 16 value chain activities at a lower cost than competitors (Porter 1980; Porter 1985). As such, cost reductions resulting from supplier improvements were assessed in terms of material costs, inventory costs, or manufacturing costs, for example. The six items loaded on one factor and the construct turned out to be reliable (α = 0.79). Krause and Ellram (1997b) point out, that the financial resources of larger firms make them more successful in their supplier development efforts. As firm size can be a be a potential source of variance that confounds research findings, we included firm size as control variable in our analysis when we tested the effect of supplier development activities on supplier firm improvements. This control variable was measured by a single item asking respondents for their firms’ annual dollar sales volume. 4. Results In order to test our research hypotheses, four ordinary least square (OLS) regression models were estimated. Table 1 presents the standardized parameter estimates and t-values resulting from these models. The first set of hypotheses pertains to the effect of supplier development activities on supplier improvement. Overall, the two equations testing H1 - H5 were statistically significant. For supplier capabilities, F = 7.64 (df = 50, 4) and the buying firm’s supplier development activities explained 38% of the variance. For product and delivery performance, F = 2.78 (df = (50, 4) with 18% of the variance explained. For the control variable of firm size, results indicate that the parameter estimates were not statistically significant. H1, that direct supplier development activities of the buying firm are positively related to supplier’s capabilities was supported with a statistically significant estimate of 0.424 (t = 3.39, p < 0.01). However, for the effect of direct 17 supplier development on product and delivery performance, as proposed in H2, the data did not reveal a statistically significant relationship. Therefore, H2 was not supported. H3 posits a positive relationship between direct supplier development and product and delivery performance. With a standardized parameter estimate of 0.275, this hypothesis was significant (t = 1.94, p < 0.05), indicating support for H3. H4 and H5 involve the combined effect of direct and indirect supplier development on supplier firm improvement. For both dependent variables, our results clearly indicate that combining direct and indirect supplier development measures has a negative impact on supplier firm improvements. The combined effect is significant with a standardized parameter estimate of -0.250 for supplier capabilities (t = -2.16, p < 0.05) and -0.266 for product and delivery performance (t = -2.00, p < 0.05), suggesting support for H4 and H5. The second set of hypotheses addresses the effect of supplier firm improvement on customer firm competitive advantage. Both equations testing H6 - H9 were statistically significant and explained substantial variance. The two supplier firm improvement measures account for 44% of the variance with differentiation strategy as dependent variable (F = 21.96, df = 56, 2), and for 39% of the variance with cost leadership as dependent variable (F = 18.01, df = 57, 2). The highly significant standard estimate of 0.633 shows, that the improvement of the suppliers’ capabilities is strongly related to the attainment of the customer firms’ differentiation strategy (t = 5.61, p < 0.01). Hence, H6 is supported. In H7, we expected that a higher level of the supplier’s product and delivery performance would also enhance the attainment of the customer firm’s differentiation strategy. The standardized estimate was not statistically significant, indicating no support for H7. H8 and H9 addressed the effects of supplier capability improvement and product and delivery performance improvement on the customer firm’s cost leadership strategy. Both standardized parameter estimates were statistically significant: for supplier capabilities, the estimate was 0.483 18 (t = 4.17, p < 0.01), and for product and delivery performance, the estimate was 0.233 (t = 2.01, p < 0.05), indicating support for H8 and H9. 5. Discussion and implications The goal of the current study was to investigate if and how the development of deficient suppliers can contribute to the achievement of competitive advantage for the customer firm. Our results substantiate that supplier development can support the customer firm’s differentiation and/or cost leadership strategy, i.e. contribute to competitive advantage. Fundamentally, we find that the two types of supplier development (direct vs. indirect) have distinct effects on supplier capability improvements and product and delivery performance improvements. More specifically, the results suggest support for the individual positive effect of direct supplier development on supplier capability improvement and the individual positive effect of indirect supplier development on product and delivery performance improvement. However, contrary to our expectations, direct supplier development activities do not result in an upgrade of the supplier’s product and delivery performance. Furthermore, we expected that direct and indirect supplier development activities in combination would bring down the improvement of supplier capabilities and product and delivery performance. Both hypotheses regarding the negative combined effects were supported. This underlines that it is important that firms engage either in direct or indirect supplier development. This finding is along the lines of Dyer, Cho, and Chu’s (1998) notion of “supplier segmentation” which contrasts durable arm’s-length with strategic partnership buyer-seller relations. While the first relates to price benchmarking and minimal assistance of the buyer firm, the second is 19 characterized through capabilities benchmarking and considerable assistance, i.e. “substantial investments in interfirm knowledge-sharing routines” (Dyer, Cho, and Chu 1998, p. 72). With respect to the impact of supplier development on the attainment of the customer firm’s differentiation respectively cost leadership strategy, our results reveal that improved supplier capabilities can be a powerful support for both strategies (considering the large standardized parameter estimates of 0.633 and 0.483). The supplier’s product and delivery performance improvement, on the other hand, only backs up a cost leadership strategy. Overall, the results emphasize the vital role of supplier capability improvements, that is, the long-term focused upgrading of capabilities embedded in the supplier’s organization (Day 1994; Hartley and Jones 1997). 5.1. Limitations of the study This study’s results must be viewed in conjunction with its limitations. First, the small sample size limits statistical power. Hence, while this study provides support for seven out of nine hypotheses with statistically significant results, it does not provide the statistical power to firmly dismiss the relationships that failed to show statistically significant results. Second, as this research is cross-sectional in nature, it cannot establish causality between variables. Only a longitudinal research design could provide better answers to questions of causality as well as the evolution of key variables such as supplier capability improvements or product and delivery performance improvements over time, e.g., over the duration of the buyer-supplier relationship. Third, the data for our analysis are based on supplier development activities performed by companies from Germany, Austria, and Switzerland. This might restrict the immediate generalizability of our findings to other geographical areas such as North America or Asia. 20 5.2. Managerial implications Firms which possess the strategies, structures, and capabilities to engage in supplier development when performance problems with suppliers arise, are equipped to exploit this powerful interfirm relationship management practice as a source of competitive advantage for their organization. Therefore, firms are advised to build up a systematic supplier development process in order to be able to identify, evaluate, conduct and follow up on supplier development projects. The sevenstep supplier development process proposed by Handfield, Krause, Scannell, and Monczka (2000) can be taken as a starting point. From a practical standpoint managers must be aware of the different routes to customer firm competitive advantage as a result of supplier development. The first key finding of this research is that the buying firm can significantly foster both types of competitive advantage (i.e., differentiation and cost leadership) by upgrading the deficient supplier’s capabilities through direct supplier development. Second, firms should only develop a deficient supplier through indirect supplier development measures if it seeks support for a cost leadership strategy. Therefore, if the buying firm pursues a differentiation strategy and is not able or willing to invest human and financial resources in the development of the deficient supplier, it should rather stay away from supplier development and switch to an alternative supplier. Third, firms should carry out either direct or indirect supplier development activities with a particular supplier at the same time or apply these different approaches consecutively. One broader, very important implication for managers involved in supplier relationship management can be drawn. Although, the awareness of purchasing and supply chain managers of their firm’s strategic directions and their involvement in the development of top-level strategies has increased in corporate practice in the past decade, this is still a critical issue (Cousins and 21 Spekman 2003; Watts, Kim, and Hahn 1992). 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Measures used in this study Scale name (scale mean; standard deviation) and questionnaire items1) Reliability2) Direct supplier development (2.74; 0.94) Our firm has undertaken supplier development with supplier X through … … giving manufacturing related advice (e.g., processes, machining process, machine set up). … training of employees from supplier X. … the transfer of employees to supplier X. … giving product development related advice (e.g., processes, project management). … giving technological advice (e.g., materials, software). … giving quality related advice (e.g., use of inspection equipment, quality assurance procedures). … the transfer of implicit knowledge. α = 0.83 Indirect supplier development (3.64; 0.97) Our firm has undertaken supplier development with supplier X through … … setting improvement targets. … auditing supplier X. … providing feedback about performance. … strong formal supplier evaluation. α = 0.78 Supplier capabilities (2.98; 0.88) Through the development of supplier X … … he was able to strengthen his management capabilities. … he was able to strengthen his manufacturing capabilities. … he was able to strengthen his logistics capabilities. … he was able to strengthen his product development capabilities. α = 0.68 Product and delivery performance (3.72; 0.89) Through the development of supplier X … … the quality of the products purchased from supplier X was improved. … the replenishment lead time of the products purchased from supplier X was reduced. … the service of supplier X’s deliveries was improved. … the reliability of supplier X’s deliveries was improved. α = 0.81 Differentiation (3.51; 1.10) Through the development of supplier X our firm was able to … … reduce time-to-market. … improve our delivery reliability. … improve the quality of our products. … improve the reliability of our products. … offer more innovative products to our customers. α = 0.86 Cost leadership (3.60; 0.93) Through the development of supplier X our firm was able to … … reduce our total costs. … reduce our material costs. … reduce the costs of our products. … reduce our inventories. … reduce our manufacturing costs. … reduce production downtimes. α = 0.79 1) 2) Response cues for all scales on a five-point Likert scale: 1: strongly disagree, 5: strongly agree Cronbach’s alpha coefficient 28 Appendix 2. Correlation matrix (1) (1) Direct supplier development (2) (3) (4) (5) (6) n.a. (2) Indirect supplier development 0.43** n.a. (3) Supplier capabilities 0.53** 0.46** (4) Product and delivery performance 0.11 0.35** 0.45** (5) Differentiation 0.34** 0.48** 0.66** 0.35** (6) Cost leadership 0.08 0.40** 0.59** 0.45** n.a. n.a. n.a. 0.57 ** n.a. ** Correlation is significant at the 0.01 level (1-tailed). Figure 1. Conceptual framework Supplier development activities Supplier firm improvements Customer firm competitive advantage Direct Supplier capabilities Differentiation H1 - H5 Indirect H6 - H9 Product and delivery performance 29 Cost leadership Table 1. OLS regression results Dependent variables and model summary Supplier capabilities Independent variables Standardized estimate t value Hypothesis Result Firm size -0.00 -0.02 ─ ─ Direct supplier development 0.42 3.39 ** H1 Support + ─ ─ Indirect supplier development 0.24 1.95 Direct supplier development X Indirect supplier development -0.25 -2.16 * H4 Support Firm size -0.07 -0.53 ─ ─ Direct supplier development 0.03 0.21 H2 No support Indirect supplier development 0.28 1.94 * H3 Support F(50, 4) = 2.78*; R2 = 0.18 Direct supplier development X Indirect supplier development -0.27 -2.00 * H5 Support Differentiation Supplier capabilities 0.63 5.61 ** H6 Support F(56, 2) = 21.96**; R2 = 0.44 Product and delivery performance 0.06 0.53 H7 No support Cost leadership Supplier capabilities 0.48 4.17 ** H8 Support F(57, 2) = 18.01**; R2 = 0.39 Product and delivery performance 0.23 2.01 * H9 Support F(50, 4) = 7.64**; R2 = 0.38 Product and delivery performance ** Significant at the 0.01 level. * Significant at the 0.05 level. + Significant at the 0.10 level. 30