Theory and its Impact on Buyer’s Performance
Improvement and Innovation
Yugowati Praharsi1,2,*, Maffie Linda Araos Dioquino1, Hui-Ming Wee1
1Department of Industrial and Systems Engineering Chung Yuan Christian University, Chung
Li, Taiwan
2
Department of Information Technology Satya Wacana Christian University, Salatiga, Indonesia
Abstract. Today’s supply chain managers are facing plenty of risks due to uncer-tainties of inbound supplies. Buyer must learn how to mitigate those unexpected risks. In this study, we explore supply risk management via structural, relational, and cognitive approaches from a buying firm’s perspective based on the social capital theory. We also propose that the three forms of social capitalsare positively related to buyer-supplier performance improvements. Consequently, the perfor-mance improvement of buyer-supplier will positively influence the innovation performance.
Keywords: supply risk, social capital theory, buyer performance improvement, supplier performance improvement, innovation performance
1
Introduction
Modern supply chain managers have to deal with uncertainties of inbound sup-plies such as changes of demand volume, on-time delivery, competitive pricing, technologically behind competitors, and quality standards. Buyer must learn how to mitigate those unexpected risks.
Nahapiet and Ghoshal(1998) proposed 3 dimensions of social capital, i.e.: the relational, the cognitive, and the structural dimensions. Research that has exam-ined buyer-supplier relationship effects on buyer-supplier performance has primar-ily focused on relational capital (Johnston et al., 2004, Cousins et al., 2006). More recently researchers have begun to consider other dimensions of social capital. Krause et al. (2007) considered the structural and cognitive aspects of social capi-tal and their effects on various aspects of buyer and supplier performance. Lawson et al. (2008) considered the effects of relational and structural capital, resulting from relational and structural embeddedness. Embeddedness refers to the degree to which economic activity is constrained by non-economic institutions. The term was created by economic historian Karl Polanyi. Carey et al. (2011) proposed an integrative model examining the relationships among relational, structural, and cognitive dimensions of social capital. Hughes and Perrons (2011) explored the evolution of social capital dimensions. Tsai et al. (2012) postulated that innovation performance is indirectly affected by 3 forms of social capital.
There are few studies that discuss on risk management in the relationship with social capital. Cheng et al. (2012) explored supply risk management via the rela-tional approach in the Chinese business environment (i.e. guanxi). The current study jointly examines three forms of social capital as a form to perceive supply risk. Also, there are few studies explored the dimensions of social capital embeddedness. Lawson et al. (2008) considered relational embeddedness such as supplier integration and supplier closeness and structural embeddedness such as managerial communication and technical exchange. Our study thus considers transaction-specific supplier development in addition to relational embeddedness and shared norms in addition to cognitive embeddedness. Either social capital the-ory or social capital thethe-ory embeddedness has been respectively included in the previous research as form to perceive supply risk, but none of the previous re-search has tried to simultaneously take both into account for explaining perfor-mance outcomes. Hence, this study is motivated by their initiatives.
In answering these gaps, we make four key contributions to the supply chain literature. First, we show that when a buying firm faces supply risk, it tends to form social networks with its key supplier to reduce risk in 3 forms of social capi-tal. Secondly, we extend the application of social capital theory in SC research by explicitly recognizing relational aspect of embeddednes (transaction-specific sup-plier development) and cognitive aspect of embeddedness (shared norms). Third-ly, we propose that the dimensions of social capital theory (social interaction ties, trust in supplier, shared vision) and the dimensions of social capital embeddedness (managerial communication, technical exchange, supplier integration, transaction-specific supplier development, shared norms) influence buyer and supplier per-formance improvements. Finally, we propose that the perper-formance improvement of buyer and supplier will positively influence the innovation performance.
In this study, we explore supply risk management via structural, relational, and
cognitive approaches from a buying firm’s perspective. Figure 1 shows a major
framework in this study.
Risk exists in supply chains and its occurrence can detrimentally affect the pro-vision of products and services to the final consumer. Supply risk has been defined as the probability of an incident associated with inbound supply from individual supplier failures or the supply market, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety (Zsidisin and Ellram, 2003). Cheng et al. (2012) proposed that when buyers perceive a supply risk situation with their key supplier, they amass social capital to deal with uncertainty and risk. Social capital can be used as a resource to reduce uncertainty and risk in different forms above. This leads to:
Proposition 1: Perceived supply risk has a positive relationship with social capital development
The social capital theory is used to explain the relationship between the buyer and the supplier.Social capital theory (SCT) has become an important perspective for theorizing the nature of connection and cooperation between organizations (Adler and Kwon, 2002). As interactions within the linkage between the firms in-crease, social capital is improved, thereby potentially increasing the flow of bene-fits. These benefits can include access to knowledge, resources, technologies, markets, and business opportunities (Inkpen and Tsang, 2005).
Nahapiet and Ghoshal(1998) proposed 3 dimensions of social capital: 1) the re-lational dimension (e.g. trust, friendship, respect, reciprocity, identification and obligation), referring to the strength of social relationships developed between buyers and suppliers in the network that is developed through a history of prior in-teractions among these people and that influences their subsequent behaviors in the network; 2) the cognitive dimension (e.g. shared ambition, goals, vision, cul-ture, and values), referring to rules and expectations of behaviors between buyers and suppliers in a network that define how a community or society will perform; 3) the structural dimension (e.g. strength and number of ties between actors, social interaction ties), referring to structural links or interactions between buyers and suppliers in social relationship.
Structural social capital refers to the configuration of linkages between parties that is whom you know and how you reach them (Nahapiet and Ghoshal, 1998). Conceptualizing structural capital as the strength of the social interaction ties ex-ists between buyer-supplier (Tsai and Ghoshal, 1998). Social interaction ties fa-cilitate cooperation in dyadic buyer-supplier relationships, and are defined as pur-posefully designed, specialized processes or events, implemented to coordinate and structurally embed the relationship between buyer and supplier (Cousins et al., 2006, Nahapiet and Ghoshal, 1998).
Social interaction ties have also been linked to performance improvements and value creation in buyer-supplier relationships (Cousins et al., 2006), because they provide a forum whereby buyers and suppliers can share information and identify gaps that may exist in current work practices. This leads to:
Proposition 2: Social interaction ties positively influence buyer and supplier performance improvements
Structural embeddedness creates the opportunity for future structural capital benefits. There are two factors in the structural embeddedness, i.e.: managerial communication and technical exchange (Lawson et al., 2008). In order to achieve
the benefits of collaboration, effective communication between partners’ perso
n-nel is essential (Cummings, 1984). Quality performance was superior between buyers and suppliers when communication occurred among design, engineering, quality control, purchasing and other functions (Carter and Miller, 1989). This leads to:
Proposition 3: Managerial communication positively influence buyer and sup-plier performance improvements
long-term relationship. Others have argued that technical exchanges help to improve buyer performance (Lamming, 1993). This leads to:
Proposition 4: Technical exchange positively influence buyer and supplier per-formance improvements
Relational capital dimension refers to personal relationships that develop through a history of interactions, i.e. the extent to which trust, friendship, respect, obligation, identification, and reciprocity exist between parties (Nahapiet and Ghoshal, 1998, Villena et al., 2011). These networks encourage buyer and supplier
to act according to one another’s expectations and to the commonly held values,
beliefs, and norms of reciprocity. The latter maintain mutual trust between supply chain partners, which reduces the negative consequences of uncertainty and risk.
Trust is an essential element of relationships and one of the key aspects of rela-tional social capital. Trust reduces the risk of opportunistic behavior and brings partnering firms closer together to collaborate more richly and to withhold poten-tially relevant resources (Inkpen and Tsang, 2005). Improved relationships and trust can lead to improved buyer and supplier performances (Johnston et al., 2004). This leads to:
Proposition 5: Trust in supplier positively influence buyer and supplier per-formance improvements
Relational embeddedness between buyers and their key suppliers can be de-fined as the range of activities integrated, the direct investments between both par-ties, and their relational capital. As a relationship evolves with a key strategic sup-plier, the relationship becomes embedded as the supplier becomes more integrated and the buyer gives more efforts in supplier development.There are two factors in the relational embeddedness, i.e.: supplier integration (Lawson et al., 2008) and transaction-specific supplier development.
When buying firms are committed to full supplier integration, they are arguably prepared to help their key suppliers through information sharing, technical assis-tance, training, process control, and direct investment in supplier operations, in re-turn for the benefits of improved performance and joint value creation (Frohlich and Westbrook, 2001). More strategic suppliers become fully integrated and the more positive experiences draw them closer to a buying firm, the richer the infor-mation exchanged (Koka and Prescott, 2002).This leads to:
Proposition 6: Supplier integration positively influence the buyer and supplier performance improvements
As buying firms increasingly realize that supplier performance is crucial to their establishing and maintaining competitive advantage, supplier development has been a subject of considerable research in supply chain management (Govindan et al., 2010). Supplier development is defined as any effort of a buying firm to increase the performance and capabilities of the supplier and to meet the buying firm’s short and/or long term supply needs (Krause and Ellram, 1997).
Transaction-specific supplier development leads to closer cooperation between manufacturers and their suppliers. This leads to:
Proposition 7: Transaction-specific supplier development positively influence the buyer and supplier performance improvements
The cognitive dimension refers to the resources that provide parties with shared expectations, interpretations, representations and systems of meaning (Nahapiet and Ghoshal, 1998). The cognitive capital is also defined as symbolic of shared goals, vision and values among parties in a social system (Tsai and Ghoshal, 1998). Congruent goals represent the degree to which parties share a common un-derstanding and approach to the achievement of common tasks and outcomes. The establishment of congruent goals can guide the nature, direction, and magnitude of the efforts of the parties (Jap and Anderson, 2003).
Shared culture refers to the degree to which norms of behavior govern relation-ships. Shared norms can be created by expectation that govern appropriate behav-ior and affect the nature and degree of cooperation among firms. Strong social norms associated with a closed social network encourage compliance with local rules and customs can reduce the need for formal control(Adler and Kwon, 2002).
A lack of norms similarities and compatible goals may trigger conflicts that re-sult in frustration and have negative effects on performance (Inkpen and Tsang, 2005). Krause et al. (2007) found support for the positive effect of shared norms and goals on cost reduction. This leads to:
Proposition 8: Shared norms positively influence the buyer and supplier per-formance improvements
Proposition 9: Shared goals positively influence the buyer and supplier per-formance improvements
2.3. Buyer and supplier performance outcomes
Performance improvements sought by buying firms are often only possible when they commit to long-term relationships with key suppliers. Long term com-mitment means that the buyer regards its suppliers as partners (Krause and Ellram, 1997). In the global market where buyer’s competitive advantage can be rapidly initiated by competitors, a commitment to innovation is inevitable to sustain com-petitive advantages and innovation performance. Commitment to innovation refers
to employee’s duty such as pledge or obligation to work on innovation. By boos
t-ing commitment to the innovation, great performance on innovation can be pri-marily achieved. This leads to:
Proposition 10: Buyer performance improvement positively influence innova-tion performance
Supplier performance improvement is defined as upgrading existing suppliers’
performance and capabilities has been recognized as one of the initiations of sup-plier development to meet the changing competitive requirements (Hahn et al.,
indi-cates buyer’s recognition and provides incentive to supplier for further outstanding achievement (Lascelles and Dale, 1989). This leads to:
Proposition 11: Supplier performance improvement positively influence inno-vation performance
The performance improvement in essence also comes from promoting buyer and supplier cooperative behavior that increases the creativity of their actions (Nahapiet and Ghoshal, 1998). The creativity encourages the accomplishment of innovation performance such as the development of new products and markets. More recently, some studies suggested pursuing innovation performance besides the traditional operational improvement. A set of innovation performance shows that it takes longer to reach the threshold of innovation performance compared with operational benefits (Villena et al., 2011). Therefore, in this study we pose innovation performance as the effect of buyer and supplier performance improve-ments.
3
Conclusion and Future Research
This study developed an integrative framework of structural, relational, and cognitive approaches to supply risk management grounded in the social capital theory and proposed its impact on buyer performance improvement and innova-tion. Our study contributed to the literature on a number of fronts.
First, we showed that when a buying firm faces supply risk, it tends to form so-cial networks with its key supplier to reduce risk in three dimensions of soso-cial cap-ital. Secondly, we extend the application of social capital theory in supply chain research by explicitly recognizing relational aspect of embeddednessand cognitive aspect of embededdness. Thirdly, we analyze the three dimensions of social capital and the social capital embeddedness in a single model, which has rarely been done in previous studies. Finally, we use a complete set of performance measures to de-velop a more complete view of how social capital facilitates a value creation. For future works, a more comprehensive study to develop performance criteria and in-dicators can be done.
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