An Integrated Model of Buyer-Seller Relationships David T. Wilson The Pennsylvania State University ISBM Report lo-1995 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
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An Integrated Model ofBuyer-Seller Relationships
David T. WilsonThe Pennsylvania State University
ISBM Report lo-1995
Institute for the Study of Business MarketsThe Pennsylvania State University
402 Business Administration BuildingUniversity Park, PA 16802-3004
(814) 863-2782 or (814) 863-0413 Fax
This publication is available in alternative media onrequest.The Pennsylvania State University is committed to the policy that all persons shallhave equal access to programs, facilities, admission, and employment without regardto personal characteristics not related to ability, performance, or qualifications asdetermined by University policy or by state or federal authorities. The PennsylvaniaState University does not discriminate against any person because of age, ancestry,color, disability or handicap, national origin, race, religious creed, sex, sexualorientation, or veteran status. Direct all inquiries regarding the nondiscriminationpolicy to the Affirmative Action Director, the Pennsylvania State University, 201Willard Building, University Park, PA 16802-2801; tel. (814) 863-0471; TDD (814) 865-3175.
U.Ed. BUS 95-081
An Integrated Model ofBuyer-Seller Relationships
David T. WilsonAlvin H. Clemens Professor of Entrepreneurial Studies
707 Business Administration BuilidingThe Pennsylvania State University
University Park PA 16802(814) 863-2782
May 1995
The author acknowledges the support of Penn State’s Institute for the Study of BusinessMarkets.
An Integrated Modelof Buyer-Seller Relationships
David T. Wilson
Buyer and seller relationships have become an integral part of business-to-business operating
strategies over the past ten years. Academics have developed reasonably well-supported models that
define
Narus
Seyed
many of the relevant variables that influence success or failure in a relationship (Anderson and
1984, 1990; Anderson Lodish and Weitz 1987; Anderson and Weitz 1990; Hallen, Johanson and
Mohamed 199 1; Wilson and Moller 199 1; Han and Wilson 1993; Morgan and Hunt 1994). We
have less empirical knowledge about the process of relationship development. Dwyer, Schurr and Oh
(1987) and Wilson and Jantrania (1993) have suggested conceptual process models of relationship
development but theses models do not integrate the existing knowledge about the variables that make for
a successful relationship. A next logical step is to create an integrated model that integrates the variables
of the empirical “success” models with the stages in the relationship process models. In this paper, an
integrated model that blends the empirical knowledge about successful relationship variables with the
conceptual process models is developed. The majority relationship studies have been cross-sectional
which does not capture the impact of situational variables nor the affect of stages in the relationship
development. I have conducted several cross-sectional studies and believed that some of the richness in
the real world is lost. While many variables have been used in modeling relationships there seems to be
some variables that make sense to consider them core relationship building blocks. When we look at
relationships in cross-section we lose the insights that developed by looking at the process of relationship
development. I propose to integrate the knowledge we have gained from the empirical studies that have
been done with the conceptual models of relationship development process. The result is a model that
argues that many of the variables are active at different stages and become latent in others.
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Since our focus is on buyer-seller relationships in business marketing situations I develop an
argument that relationships are likely developed in high impact areas in the buying area. Next the
substantial body of literature on relationships, partnerships, strategic alliances and joint ventures is
reviewed to create a list of relationship “success” variables that should be included in the model. A five
stage process models emerges from the literature and is the framework for the development of an
integrated model. I argue that variables active, that is they are the focus of the partners’ attention in some
stages and latent on other stages. A variable is latent when it is in the background of the current
interaction between the partners but is not receiving their attention. I conclude with a discussion of the
need to reflect situational factors in our future research.
THE CONTEXT OF BUYER-SELLER RELATIONSHIPS
The fact that buyers and sellers have relationships is nothing new. Relationships between buyers and
sellers have existed since humans began trading goods and services. These relationships developed in a
natural way over time as the buyers and sellers developed trust and friendships supported by quality
products and services. Today these relationships have become “strategic” and the process of relationship
development is accelerated as firms strive to create relationships to achieve their goals. In this stressful
environment of relationship acceleration, there is less time for the participants not only to carefully
explore the range of long-term relationships development. The expectations of performance have
increased, making the development of a satisfactory relationship even more difficult.
An important phenomenon related to buyer-seller relationships is that many buyers are developing
single source suppliers because of the pressure to increase quality, reduce inventory, develop just-in-time
systems, and decrease time to market. The intensity of contact needed to accomplish high quality,
implement J-I-T, and reduce time to market could not be achieved with multiple sources of supply. The
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ultimate goal in developing these capabilities is to reduce costs. These cost reductions can be obtained
through one of two models. In an adversarial model, buyers pit suppliers against each to achieve lower
costs. In a cooperative model, both parties achieve lower costs through working together to lower both
buyer’s and seller’s operating costs. This reduction is accomplished through better inventory management
and elimination of unnecessary tasks and procedures.
One basic principles underlying the cooperative model that it retains business relationship where the
partners are trying to maximize their position within the buyer-seller relationship.
Not all suppliers are appropriate partners for the type cooperative of relationship with which we are
concerned in this paper. Figure 1 describes a simple 2x2 table, useful for categorizing those supplier’s
buyers who are candidates for in-depth relationships. The horizontal is the amount of value that the
supplier adds to the product that the buyer is producing. The ordinate is the degree of operating risk
associated with using the firm as a supplier. Operating risk refers to the risk that a buyer incur due to
supplier failure to produce quality goods, on time delivery, or any of the other things that can go wrong
and cause difficulties for the buying organization. The scale is inverted with high operating risk at the
bottom and low operating risk at the top.
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Amount of operating riskassociated with doing
business with the seller
High
Low High
Value added to the buyer’s product by the seller
Figure 1. Classifying Potential Partners
The firms that fall into the upper right quadrant add value to the firm’s product and have a low
operating risk as a partner. The high value added make them important to the firm and their low operating
risk make them candidates for relationship development. A supplier who adds value to a buyer’s product
increases the eventual value added at the market level. These value added purchases tend to impact
operating costs and/or the ability to achieve higher level of market price. For example, Breggs and
Stratton provide high name recognition engines for lawnmowers and snow throwers. They add significant
value to the product. These are the prime types of buyer-seller relationships that are the focus of this
paper.
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EMPIRICAL MODELS OF BUYER-SELLER RELATIONSHIPS
The basic elements of relationships come from examining the literature to determine those variables
that have been successful predictors of relationship performance in empirical studies. Although the focus
of this paper is on buyer-seller relationships, I draw upon channel relationship and strategic alliance
research to develop a set of constructs that seem to define the outcome of a relationship.
The Industrial Marketing and Purchasing Group (IMP Group), using an ethnographic methodology,
developed an “interaction approach” which is described in their relationship model (figure 2).
ATMOSPHERE OF THE RELATIONSHIP
/ Power dependence -- Conflict -- Co-operation -- Expectations -- Social distance \
Commitment is the most common dependent variable used in buyer-seller relationship studies
(Anderson Lodish and Weitz 1987, Anderson and Weitz 1990, Jackson 1985, Dwyer, Schurr and Oh
1987, Moorman, Zaltman and Deshpande 1992). Commitment is an important variable in discriminating
between “stayers and leavers” (Mummalaneni, 1987). It is the desire to continue the relationship and to
work to ensure its continuance. I take the Dwyer, Schurr and Oh, (1987 p. 19) view that commitment is
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an, “implicit or explicit pledge of relational continuity between exchange partners”. In a similar vein,
Moorman, Zaltman and Deshpande (1992, p. 3 16) define commitment as an enduring desire to maintain a
valued relationship.
Commitment implies importance of the relationship to the partners and a desire to continue the
relationship into the future. Hardwick and Ford (1986) point out that commitment assumes that the
relationship will bring future value or benefits to the partners. There is little doubt that commitment is a
critical variable in measuring the future of a relationship.
Trust
Trust is a fundamental relationship model building block and as such is included in most relationship
models. Most definitions of trust involve a belief that one relationship partner will act in the best interests
of the other partner. Below are four of the most often cited definitions of trust:
1. A willingness to rely on an exchange partner in whom one has confidence(Moorman,Zaltman and Deshpande, 1992)
2. One party believes that its needs will be fulfilled in the future by actions taken by the otherparty. (Anderson and Weitz, 1990)
3. A party’s expectation that another party desires coordination, will fulfill obligations and willpull its weight in the relationship. (Dwyer, Schurr and Oh, 1987)
4. The belief that a party’s word or promise is reliable and a party will fulfill his/her obligationsin an exchange relationship. (Schurr and Ozanne, 1985)
The theoretical justification for the above and other definitions of trust are drawn from literature outside
the marketing domain (Pfeffer and Salanick 1978, Williamson 1979, 198 1, Rotter 1967, Zand 1972,
Deutsch 1958). We include the concept of trust in marketing studies based upon common sense, reports
from both practitioners and marketers and a vigorous literature detailing trust research. The inclusion of
trust as a variable does not always work the way we predict (Anderson and Narus 1990, Han and Wilson
1993, Ganesan 1994) which may be part of the difficulty in defining trust within the study. Anderson and
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Narus (1990 p. 54) point out that ,“when asked about their perceptions of their firm’s trust in a working
relationship, informants give apresent state report; that is, they answer on how much their firm trusts the
partner’s firm at the current point in time.” Time is only one of many elements that we need to account for
when we use trust as a variable in relationship research. Nevertheless, for our current purposes I believe
that trust is a critical variable in relationship research.
Cooperation
Cooperation has been defined as, “similar or complementary coordinated actions taken by firms in
interdependent relationships to achieve mutual outcomes or singular outcomes with expected
reciprocation over time” (Anderson and Narus, 1990). Morgan and Hunt (1994) seem to accept the above
definition of cooperation but continue to expand the definition by emphasizing the proactive aspect of
cooperation vs. being coerced to take interdependent actions. The interaction of cooperation and
commitment results in cooperative behavior allowing the partnership to work ensuring that both parties
receive the benefits of the relationship.
Mutual Goals
I define the concept of mutual goals as the degree to which partners share goals that can only be
accomplished through joint action and the maintenance of the relationship. These mutual goals provide a
strong reason for relationship continuance. Wilson, Soni and O’Keeffe (1994) suggest that mutual goals
influence performance satisfaction which, in turn, influences the level of commitment to the relationship.
Shared values is a similar but broader concept. Morgan and Hunt (1994, p. 25) define shared values
as, “the extent to which partners have beliefs in common about what behaviors, goals and policies are
important, unimportant, appropriate or inappropriate, and right or wrong.” Although the wider concept of
shared values has some appeal it seems too broad to be effectively operationalized. Norms are the rules
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by which values are operationalized. Heide and John (1992, p.34) suggest that norms differ in their
proscribed behavior towards collective versus individual goals. Individual goals create norms of
competitive behavior whereas, “relational exchange norms are based on the expectation of mutuality of
interest, essentially prescribing stewardship behavior, and are designed to enhance the well being of the
relationship as a whole. Most likely, mutual goals encourage both mutuality of interest and stewardship
behavior that will lead to achieving the mutual goals. Perhaps it is easier to measure the degree to which
the partners share the same goals than it is to measures values and norms.
Interdependence and Power
Interdependence and power imbalance are important relationship variables. The power of the buyer or
seller is closely tied to the interdependence of the partners in a relationship (Anderson and Narus 1987,
1990, Anderson Lodish and Weitz 1987, Heide and John 1988, Dwyer, Schurr and Oh 1987, Ganesan
1994). Anderson and Weitz (1990) defined power imbalance as the ability of one partner to get the other
partner to do something they would not normally do. Power imbalance is directly related to the degree of
one partner’s dependence on the other partner. Power and dependence have been focal issues in
traditional and relational channel research. Han, Wilson and Dant (1993) found that both buyers and
sellers saw the need to increase interdependence on the other.
Performance Satisfaction
Because we are discussing business relationships, performance satisfaction is a critical variable.
Partners, especially sellers, must deliver high level satisfaction on the basic elements of the business
transaction. Buyers need to satisfy their partner’s business needs or they risk becoming marginalized.
General Motor’s purchasing in 1992-3 under the leadership of Jose Ignacio Lopez de Arriortua took a
very hard line on price negotiations. The results were large savings for General Motors and battered
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suppliers. The detrimental cost to General Motors might be in relationships; one automotive consultant
states, “I don’t know of any major supplier who will take a new design to GM today, because , in the end,
GM will give it to the lowest bidder. When you shut down that innovation spigot, you get a product that is
less competitive” (Taylor, 1994).
We define performance satisfaction as the degree to which the business transaction meets the
business performance expectations of the partner. Performance satisfaction includes both product specific
performance and non-product attributes.
Structural Bonds
The concept of structural bonds is the vector of forces that create impediments to the termination of
the relationship. While individual constructs (non-retrievable investments, Cl,*,, shared technology and
adaptations) tend to either strengthen or weaken a relationship, their interaction may be greater than the
sum of their parts in creating a force to hold a relationship together. Structural bonds develop over time as
the level of the investments, adaptations and shared technology grows until a point is reached when it
may be very difficult to terminate a relationship. Firms with high levels of structural bonding were found
to have a higher level of commitment to the continuance of the relationship than firms with lower levels
of structural bonding (Han and Wilson, 1993).
Comparison Level of the Alternatives
Drawing upon the work of Thibault and Kelley (1959) Anderson and Narus (1984, 1990) define the
comparison level of alternatives (Cl,,,) as the quality of the outcome available from the best available
relationship partner. They note that quality of the outcome when judged against alternatives is a measure
of the dependence of one partner on the other. If there is a wide array of high quality partners, dependence
will be low but if the level of Cl,,, is low the partner will be less likely to leave the relationship because
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the alternative partners are not as attractive as the current partner. (Anderson and Narus 1990, 1990, Han
and Wilson 1993) support the influence of Cl,,, in relationship research.
Adaptation
Adaptation occurs when one party in a relationship alters its processes or the item exchanged to
accommodate the other party. (Hakansson 1982; Han and Wilson, 1993). Hallen, Johanson and Seyed-
Mohamed (199 1) found that both the buyer and seller make adaptations to the other. They expect that
adaptation behavior will vary over the life of the relationship. In the early states it will be a means to
develop trust, and in the mature stage it will expand and solidify the relationship. Adaptations tend to
bond the buyer and seller in a tighter relationship and create barriers for entry to a competing supplier
(Hallen, Seyed-Mohamed and Johanson 1988; Hallen, Johanson and Seyed-Mohamed 1991).
Non-Retrievable Investments
Non-retrievable investments are defined as the relationship specific commitment of resources which a
partner invests in the relationship. These non retrievable investments (capital improvements, training, and
equipment) cannot be recovered if the relationship terminates. The existence not only of these non-
retrievable investments, but also of the amount at stake, creates a hesitancy within the parties to terminate
a relationship. This hesitancy is directly related to the transaction specific investments described by
Williamson (1975, 1985, 1981). The assumption of economic opportunism is inherent in transaction cost
analysis (TCA) in that a partner who has made a substantial non-retrievable investment may be at risk if
appropriate safeguards are not developed to stop exploitation of the at-risk partner by the other partner.
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Shared Technology
Shared technology is the degree to which one partner values the technology contributed by the other
partner to the relationship. It may range from product level technology to the linking of computer
systems. The creation of shared technology has been found to strain a relationship in the early stages of
the development of the technology but inevitably it contributes to a stronger relationship when the
technology is up and working (Vlosky and Wilson, 1994). Han and Wilson (1993) report that technology
contributes to increasing the commitment to the relationship.
Social Bonds
Social psychologists have used social bonding to investigate friendships, sexual relationships, family
and group interactions (McCall 1970; Turner 1970; Johnson 1982). Personal social bonds develop
through subjective social interaction. Individuals may develop strong personal relationships which tend to
hold a relationship together. Mummalaneni and Wilson (1991) found that buyers and sellers who have a
strong personal relationship are more committed to maintaining the relationship than less socially bonded
partners. In a more complex buying situation, Han and Wilson (1993) found that social bonding did not
contribute to buyer-seller commitment. I define social bonding as the degree of mutual personal
friendship and liking shared by the buyer and seller.
THE PROCESS MODEL
We now develop a process model that builds on the work of Dwyer, Schurr and Oh (1987) with the
hybrid concept of Borys and Jemison (1989) by integrating the constructs developed above with the
relationship development stages of the model. Relationships research tends to be cross-sectional in nature
and likely captures relationships at different stages of development. We believe that the constructs have
both an active phase where they are the center of the relationship development process, and a latent phase
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where they are still important but not under active consideration in relationship interaction. Changes in
environmental forces or relationship participants may activate a construct. For example, trust may be very
active in the early stages of the process but become latent until an incident, such as a change in managers,
makes it active again. We define an active construct as one that receives a great deal of manager time and
energy. A latent construct is one in which the main issues have been settled to the manager’s satisfaction
and does not receive time or attention. It has become part of the operating environment.
A hybrid relationship is one that neither of the buying or selling firm but is a composite of the
cultures of the two firms. It straddles the space between the firms with a unique blend of the cultures of
the firms. Williamson( 1991) describes hybrids in relationship to the polar modes of markets and
hierarchies with hybrids being in the middle between the two forms of governance structures. Thorelli
describes hybrids as organizational networks that straddle markets and hierarchies. Hybrids use networks
of relationships based on power and trust to exchange either influence or resources.
Borys and Jemison (1989) define hybrids as “organizational arrangements that uses resources and/or
governance structures from more than one existing organization”(p235). Their broad definition covers a
wide range of organizational forms making it difficult to define and analyze hybrids precisely. Borys and
Jemison also suggest that a theory of hybrids should, “address the multiplicity of issues raised by hybrids,
and it should integrate previous research in these areas into a theoretical whole. Existing theory fails on
these counts.” ( Borys and Jemison, 1989, ~235).
Their model has four stages: 1. defining the purpose of the relationship, 2. setting the boundaries of
the relationship, 3. value creation, 4. hybrid stability. I add the search and selection of an appropriate
partner as the preliminary stage in the process to make the process a five stage model.
The partner search and selection stage is a more active stage than is implied in the“awareness” stage
in the Dwyer, Schurr and Oh (1987, p. 15) model which they define as, “Party A’s recognition that party
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B is a feasible exchange partner”. In many instances, the buyer already may be purchasing products or
services from the seller but decides to move to a deeper relationship with a supplier to accomplish internal
goals such as lowering costs through a TQM and JIT system.
Borys and Jemison (1989) developed their hybrid model to address organizational problems that arise
in mergers, acquisitions and joint ventures. Although supplier and buyer issues are only briefly discussed,
the authors’ concept of an emerging hybrid structure of two organizations joining together in an intimate
relationship, is powerful and compelling. I extend their concept by merging the work on modeling
relationships with the five stage model of relationship development.