Chains, holes, and links: Organisation of activities in supplier relationships in the Russian transition economy

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Journal of Purchasing & Supply Management 10 (2004) 233–245

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Chains, holes, and links: Organisation of activities in supplierrelationships in the Russian transition economy

Martin Johanson�

Department of Business Studies, Uppsala University and Mid Sweden University, Foretagsekonomiska Institutionen, Ekonomikum B383,

Box 256, 751 05 Uppsala, Sweden

Received 30 March 2002; received in revised form 2 March 2004; accepted 17 December 2004

Abstract

In the context of the transition to market economy as a way to accommodate new ways of managing supply, the paper analyses

the chain of activities performed in four supplier relationships in the wood-processing industry in Russia. In contrast to what might

be expected, the chains of activities in the cases demonstrate different orders of activities, implying that firms tend to organise their

chains differently, depending on the character of the relationship. Moreover, the four cases also indicate that activities usually

performed by the supplier in Western market economies are still carried out by the customer in Russia. It also seems that the

interfaces in the chains are seldom characterised by mutually adapted activities and that the few mutual adaptations observed are to

be found at the customer level. Consequently, the activity link between the supplier and the customer tends to be weak; payment and

quality control are the only activities that have been adapted to the relationship as such. The paper concludes with a discussion of

three strategies for supply management in transition economies.

r 2005 Elsevier Ltd. All rights reserved.

Keywords: Activity; Chain; Holes; Links; Relationships; Transition economy; Russia

1. Introduction

Securing supply was perceived by Soviet managers asthe biggest problem during the planned economy(Berliner, 1957). The shortage economy meant thatestablishing and maintaining control over supply wasessential for Soviet firms. Despite the fact that theplanned economy was replaced by an embryonic marketeconomy (Eliasson, 1998; Fischer and Gelb, 1991; Pengand Heath, 1996), shortage of materials and supplymanagement are still major constraints for Russianfirms (Blanchard and Kremer, 1997; Buck et al., 1998;Filatotchev et al., 1996; Gurkov, 1996; McCarthy andPuffer, 1995; Shama, 1992), but so far there is limitedknowledge about how firms manage their supply in thetransition economy. Johanson (2004), Peng and Heath

e front matter r 2005 Elsevier Ltd. All rights reserved.

rsup.2004.12.002

ing author.

ess: [email protected].

(1996) and Salmi (1996) argue that the firms should shiftfrom an intra-organisational to an inter-organisationalstrategy. Consequently, a relationship perspective seemsappropriate for the purpose of this paper, as it supportshow Russian firms, 5 years after the so-called transitionwas introduced, perform activities in relationships withtheir suppliers.The literature on inter-organisational relationships

has evolved as one of the major research streams insupply management over the past few years. Partnership(Johnson and Lawrence, 1988), outsourcing (Mullin,1996; Venkatesan, 1992), and supply chain relationships(Christopher and Juttner, 2000) are some of the researchtraditions that focus on the relationship betweencustomer and supplier in a supply perspective. Thispaper draws on the research tradition, initiatedby the Industrial Marketing and Purchasing (IMP)group (Ford, 1997; Hakansson, 1982), and on thestudies within that tradition, which have their focus

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ARTICLE IN PRESSM. Johanson / Journal of Purchasing & Supply Management 10 (2004) 233–245234

on the interaction and organisation of the activitiesin supplier relationships (Araujo et al., 1999; Gaddeand Hakansson, 1993; Gadde and Snehota, 2000).Common to these studies is their treatment of theactivities the firms perform by using either the relation-ship or the network as the unit of analysis.Three critical issues follow from this point of

departure:

(1)
How is the chain of activity in the relationshipconstructed, that is, what is the order of the activitiesin the relationship?
(2)
Who is doing what? In other words, is the customeror the supplier performing the activity?
(3)
How are the interfaces built between the activities inthe chain?
The paper is organised as follows. The first sectiondiscusses supply management in the planned economyand attempts to argue that a specific activity structureevolved as a result of plan governance. The next sectiondefines the activity concept, and then presents theorganisation of activities in supplier relationships inthe transition economy. The method section follows.Four case studies are then presented and analysed in twosteps, first giving the background to the relationshipsand secondly presenting a cross-case analysis. The paperends with a discussion on the theoretical contribution tothe development of the activity concept and how firmscan manage activity chains in Russia.

2. Supply management in the planned economy

The Soviet economy offered two main ways ofmanaging supply. The first was through the official,planned distribution system, and the second wasthrough the unofficial channels characterised by strongrelations between specific people.Probably the most fundamental feature in the Soviet

economy was the idea of replacing the market with anadministrative and central planning system. The firmsregularly received quantitative plans from the planauthorities. The plan specified from whom the firmwould receive its products and in what quantities. Butthe products were seldom distributed according to plan(Berliner, 1957). The shortage economy forced the firmsto keep big stocks, and the firms learned not to trust theofficial distribution system (Berliner, 1957). In thefaceless market (Salmi, 1996) the distribution systemwas not business-driven but production-driven, whichmeant the customer had the responsibility for theexchange. The supplier was not rewarded for satisfyingthe customer, which meant that activities like qualitycontrol, transportation, service, production of spareparts, training, etc., were usually performed by the

customer. Owing to the high importance that securingsupplies had for plan fulfilment, top management wasmore involved in purchasing compared to firms inmarket economies (Banting et al., 1991).The ‘‘taut planning’’ system also meant that an

unofficial distribution system emerged (Berliner, 1957;Nove, 1984). The non-flexible planning system, owing toits tautness (Ericson, 1991), was vulnerable to any kindof disturbance, and when disturbances did occur theyhad severe consequences and caused shortages, which, inturn, spread throughout the system. At the firm level,this meant that when a firm received insufficientquantities, it had the option of contacting the ministryand negotiating for additional resources. Regardless,trade between firms was forbidden, and if it took place,the companies involved risked heavy penalties. A secondreason for firms being penalised was not fulfilling theplan. It was vital to have a close relationship withindividuals at the Ministry, because that made addi-tional resources, faster deliveries, and penalty reductionspossible. Owing to the constant shortages, firms wereoften forced to secure supplies outside the boundariesof the official distribution system (Berliner, 1957;Grossman, 1977; Ledeneva, 1998; Nove, 1984; Pufferand McCarthy, 1995). The black economy, where giftsand bribes were accepted and where blat (string-pulling,favouritism) and tolkachi (instigators) existed, operatedas an additional system.

3. Organisation of activities in relationship

Interaction between several people and on severallevels between customer and supplier was one of themain observations made in the first study of the IMPgroup (Hakansson, 1982). The concept of interactiontoday also incorporates how activities are organisedin relationships between customers and suppliers(Hakansson and Snehota, 1995). Thereby, the notionof interaction implies not only that firms in a relation-ship act and react, but that they adapt and link theactivities they perform to each other. As Dubois (1998)suggests, production can be viewed as a chain ofactivities and the relationship between customer andsupplier as a link in that chain. Snehota (1990, p. 42)defines the firm as ‘‘a pattern of activities that linktogether a set of actors and resources with the purposeof exploiting exchange in a market’’. The pattern impliesthat the performance of the activities is crucial to theconduct of the exchange. Activities performed by acustomer are more or less related to its supplier.Performance of an activity gives control over theactivity because it is through performing an activitythat an actor develops specific knowledge and skills(Ford et al., 1993), which enable the actor to claim itsshare of the economic benefits of the activities

ARTICLE IN PRESSM. Johanson / Journal of Purchasing & Supply Management 10 (2004) 233–245 235

performed. Consequently, letting the counterpart per-form the activity means that it also will develop therequisite skills and knowledge. The choice of performingan activity or letting the supplier perform it is thusrelated to whether or not the customer prefers to pay thesupplier to do it. That is, it is a choice of whether tomake or buy. This issue can be discussed from theperspective of each activity separately or, in the IMPtradition, as a chain of activities, which are more or lessadapted and interrelated (see Arnold, 2000; Freytag andKirk, 2003; Hakansson and Snehota, 1995 for variousperspectives on the activity concept).Activities are defined as a set of acts (Hakansson and

Snehota, 1995), and in each exchange episode, the firm’sresources are organised vis-a-vis the other firm’sresources and brought together along an interface ofvarious activities (Dubois, 1998; Richardson, 1972). Inthis context, three aspects of the activities may beidentified. The first two aspects concern the order of theactivities in the activity chain and the interface betweentwo activities in the chain, while the third aspectconcerns the relationship between the supplier andcustomer as an activity link (see Fig. 1).

First, the chain of activities runs from the supplier tothe customer and usually consists of several activitiesperformed by the supplier and the customer. In eachrelationship there is a specific order of the activities in the

activity chain. It is determined by how the supplier andthe customer divide the activities between themselves,but also by the order in which the activities areperformed. The division of activities is a matter ofwho is doing what. For instance, in Fig. 1, the activitiesare performed in a specific order from A to H. The orderof the activity chain is a result of a process whereinvestments are made in specific activities in terms ofboth tangible and intangible resources, which, in turn,makes the chain stable and strong. Therefore, thetransformation and replacement of activities mean thatthe surrounding activities have to be changed as well, atleast partly.

Second, in the chain of activities there are several

interfaces between two activities. In an interface the

Supplier Customer

Activity performed by the supplier

A C B GD E F H

Interface

Activity performed by the customer

Fig. 1. Order of activities, interfaces and activity links in supplier

relationships.

activities can be more or less adapted to each other. Theinterfaces are usually to be found within the boundariesof a firm, for instance between activities F and G inFig. 1, but also where the chain of activities crosses theboundaries between the supplier and the customer(the interface between activities D and E in Fig. 1). Ifthe customer decides to integrate vertically and to makeinstead of buying, it follows that it can also performactivity D. However, the interface between the two firmsin a relationship is co-ordinated by co-operation(Richardson, 1972). An interface with two mutuallyadapted activities is closely complementary, that is, aspecific combination of two activities results in highervalue (Blankenburg-Holm et al., 1999) than if one ofthem would be performed in combination with a thirdactivity.

Third, over time, the firms in the relationship step-by-

step link the activities more tightly to each other, whichresults in the erosion of the firms’ boundaries (Heide andJohn, 1990). This linking process implies that the firmsadapt various activities (Hallen et al., 1991), whichincreases the interdependence, since adaptation usuallymeans the exclusion of alternatives. A link denoteshow the relationship links activities performed bythe supplier (activities A–D in Fig. 1) to the activitiesperformed by the customer (activities E–H in Fig. 1).Dubois (1998) and Richardson (1972) indicate that thedifference between an interface between the two firms inthe relationship and the interface between two activitieswithin one of the two firms is the fact that, in arelationship, different resources are used for under-taking the activities; this means that activity linking is aform of co-ordination and is achieved by adapting thefirm’s own activities to the counterpart’s activities(Hakansson and Snehota, 1995).

4. Supplier relationships in the transition economy

In the light of the discussion of the activity conceptand the literature review on supplier relationships inplanned economies, four observations can be made:

(1)
The hierarchical planning and official distributionsystem resulted in a homogeneous activity structure,where the order of activities in chains in variousrelationships was the same.
(2)
Moreover, several activities, which were perfor-med by the supplier in market economies, were insteadperformed by the customer in the planned economies.
(3)
Interfaces between activities in the chains wereusually characterised by few adaptations.
(4)
In order to handle the shortages and the non-flexibleplanning system, activities related to the transfer ofownership, like transportation and payment, weresometimes performed in an illegal way.


Both Dubois (1998) and Richardson (1972) studiedactivities in ongoing operations in a stable context,where there were no structural changes, but the objectiveof the institutional changes in Russia was to reallocatethe use of resources in the economy and to cause change.Thus, it seems reasonable to expect that Russian firmsbegan to do other things and in other ways, that is, toreorganise their activities in relation to other firms. Onthe other hand, since activities are not performed inisolation but are dependent on other activities and onthe resources used to perform the activities, it is alsolikely that the transformation of the chains andinterfaces of activities takes time. Thus, one couldexpect that the customer would still perform themajority of the activities that the supplier performs inWestern market economies, and that the interfaces inthe chains would be characterised by few mutuallyadapted activities.Relationships are organised in a specific way, and

resources such as equipment and know-how have beenallocated over a long time; although customers maybegin to demand adaptations from the suppliers, thechanges have to fit into the existing chain of activities.This means that a single firm which reorganises itsactivities either has to be joined by another firm in thatreorganisation or a third firm has to fill the void. Thus, itis difficult for a single supplier or customer to change theorder of activities. If it does so, it is likely that holes willappear in the chain. Holes are defined as those activitiesthat the supplier expects the customer to perform andvice versa, that is, activities that are not performed byanyone. The activity hole is a concept, which can beused to explain theoretically the inertia of the reorga-nisation of activities in supplier relationships.

1The international classification system classifies wood according to

certain categories depending on species, compactness, the number of

twigs per unit area, cracks, discoloration and other defects, and so on.

The wood has to be dried in facilities with an adjustable temperature so

it retains a specific humidity level. Some types of wood are more

vulnerable than others to the formation of cracks when being dried.

They must be dried for a longer time and require more sensitive

equipment than the more hardy types of wood, which means higher

capacity and more expensive equipment. Hardwood is more sensitive

than conifers.

5. Methodology

5.1. Research sites and data collection

In the light of the statement by Peng and Heath (1996,p. 493) that ‘‘[it] seems that more research should bedirected toward the firm in planned economies intransition’’ and that ‘‘[at] this stage, perhaps empiricalefforts should be focused on qualitative field studies inthese countries’’, a case study approach was chosen forthe present research. Such an approach is adequatewhen little is known about specific phenomena(Eisenhardt, 1989), and in line with her recommendation(1989) the research design is based on multiple cases ofrelationships between customers and suppliers of wood.In order to generate theory, four cases were selected.The data were collected between January and July 1997,and different data collection methods like interviews,documentation, and direct observation were combined.The main source was a number of semi-structured

interviews. In total, 17 interviews were made with peopleworking daily with purchasing. The interviews weremade at the firms, in Russian without interpreter, andthey typically lasted for 90min, although some con-tinued for several hours. The interviews were transcribedor tape-recorded.Four supplier relationships were selected according to

the following criteria:

(1)
The relationships should deal with buying of woodfrom a supplier in the same region as the customer.
(2)
The relationships should ccncern an external supplier. (3) The relationships should all be of long-term
character, that is, they should have lasted for atleast 5 years.

(4)
The suppliers should be among the customer’s threelargest, in terms of the customer’s volume ofpurchases.
In two of the cases, with Chairs and Tables and withRed Star, the relationships concerned the biggestsuppliers. In one of the cases, Russkiy Dom, the biggestsupplier was a daughter company, and, consequently,the second biggest supplier was selected instead. In thefourth case, Siderov & Co, the customer could notspecify which supplier was the biggest one among threefirms. Instead of judging by volume it chose the supplieramong the three largest that supplied the mostimportant products for Siderov & Co. All firms areidentified by pseudonyms. The four customer firms arelocated in two regions in the European part of Russia,one of them not far from St. Petersburg and the secondclose to Moscow. Basic facts about them are presentedin Table 1.

5.2. Observing the activities

The relationships within which wood1 is purchasedfor the manufacture of furniture are defined by theactivities involved in cutting and manufacturing thefurniture. These were identified by two pilot studieswhere large Swedish manufacturers of kitchen furniturewere investigated (Andersson, 1997; Funke et al., 1997).The purpose of the pilot studies was to identify thoseactivities that were assessed as crucial in the firm’spurchasing operations. Within the two activities, cutting

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Table 1

Facts about the customers

Siderov & Co Chairs and Tables Russkiy Dom Red Star

Type of firm Founded in 1986, but

now an open joint stock

company in 1993 and

controlled by the

managing director (90%).

Founded in 1992 and owned

by the managing director

(50%) and the chief engineer

(50%).

Founded as a joint venture

between a Western firm (70%)

and the regional

Woodworking Association

(30%) in 1989.

Founded in 1947 and

privatised 1992. Owned

by the employees and

retired workers. An open

joint stock company.

Size 30 employees. 85 employees. 120 employees. 370 employees.

Equipment and

production

All equipment is Russian

and has an average age of

ten years. The

manufacturing is

automated and is done in

small batches.

The equipment is partly of

foreign origin, but the

majority is Russian and

around ten years old. The

major part of production

takes place at the main site.

Chairs and Tables mainly

produces in small lots. The

premises at the headquarters

are used for product

development and

manufacturing of furniture in

small series.

The foreign firm imported all

the equipment required. The

production is organised in

partly automatic transfer

lines. The main building

contains one line for

production of glulam and one

for production of building

material. In another building,

doors, windows, wainscot

panels, and parquet are

produced.

The equipment in the

carpentry shops is Soviet

and more than ten years

old. The carpentry and

planing shop and the saw

mill are located at the

main site. The second

carpentry shop mainly

produces window frames.

Products (% of

the turnover)

Exclusive wood furniture

is the most important

product (50%). Wood

details for historical

buildings make up 30%

and special constructions

in wood 20%.

The most important products

are furniture, bookshelves,

and hall furniture made from

laminated board. The only

wood product is a birch chair.

Volume is 100 chairs per

month (17–18%). Furniture

made from laminated board

accounts for less than 10%.

Before 1996, supporting

wooden constructions and

pre-fabricated housing stood

for more than 50% of the

turnover. Now remaining

products like construction

components, for instance,

doors and windows, are the

biggest product group.

The main products are

window frames (25%)

and door frames (15%).

Planed and milled

woodwork products

account for 35%.

M. Johanson / Journal of Purchasing & Supply Management 10 (2004) 233–245 237

and manufacturing, seven others were identified, whichto a large extent determined the perceived quality of therelationship from the customer’s point of view.Moreover, the pilot studies observed two transaction

activities (Dubois, 1998) or transfer activities (Hakans-son and Johanson, 1992), viz., transportation andpayment, which move the product from the supplier tothe customer. Transportation transfers the productphysically, whereas payment implies a change of own-ership of the product. The remaining five activities canbe viewed as transformation activities (Dubois, 1998;Hakansson and Johanson, 1992) as they refine andmodify the product, but without a change of ownership.The most important activities in the relationshipbetween the actors selling and buying wood are sawing,drying, and quality control. Sawing either produces astandard size or a special size, that is, it is adapted to thecustomer’s use of the product purchased in manufactur-ing. In the same way, drying is either performed for thetransportation of the wood or as a preparation forsawing to a special size. Drying for transportation isusually done by the supplier, which results in a productin which 20% of the weight is water. After that, thewood is dried for the manufacturing of furniture, whichmeans it will comprise about 10–12% water by weight.Either the supplier or the customer can perform the

drying. The advantage of the supplier doing it is areduction in transportation costs because of the reducedweight. An important activity is quality control, whichin the pilot studies was performed by the supplier.Sawing to special size and drawing for production offurniture and quality control are activities that are tiedto each specific customer’s need.

6. Case studies

6.1. The relationship between Siderov & Co and its

supplier Rubin (Case 1)

When Siderov & Co secures an order for a specificproduct, the factory manager contacts three to fivepotential suppliers of wood and inquires about theircapacity to supply the wood needed. The factorymanager is in charge of all negotiations. Rubin mostlysupplies birch wood, but also high-grade wood likebeech, lime, and oak. The wood should be of the highestpossible quality. It is always possible for Rubin to offerthese types of high-grade wood in the small quantitiesneeded by Siderov & Co. Rare types of high-grade woodare managed beside the current operations as and whenRubin comes across it, often when cutting ordinary


wood. It is important to have know-how when buyingsemi-manufactured high-grade wood, but there is a highrisk that the pieces of high-grade wood will notcorrespond to expectations. For Siderov & Co, this is‘‘buying a pig in a poke’’, since a piece which looks goodcan be marred by deformity, discoloration, insects, or rot.The deal is set up without any documentation, whichrequires that Siderov & Co has a good knowledge ofwhat has been agreed upon since it does not realise thetrue value of the wood until it is sawn. The volume thatSiderov & Co buys amounts to less than 1% of Rubin’sturnover. Siderov & Co purchases on an irregular basis,and there is usually a long time gap between thepurchasing occasions. Its needs for regularity andpunctuality are not large. Siderov & Co is only interestedin what Rubin has in stock on the occasion.

6.2. The relationship between Chairs and Tables and its

supplier DOP (Case 2)

The managing director at Chairs and Tables conductsalmost all negotiations with the suppliers himself. Threeengineers are involved in the purchasing activities. Oneof them, the chief constructor, is also responsible forputting the wood in production and for ensuring thatthe products are of satisfactory quality. One of theengineers is mainly responsible for the purchasing ofparticleboard, while the factory manager buys the birchwood because of his previous experience and relation-ship with DOP. DOP is Chairs and Tables’s biggestsupplier. It mainly produces birch wood and pine wood.The annual capacity is 50,000m3 of sawn pine wood and30,000m3of sawn birch when the timber is taken fromits own felling. For the present monthly production of600 chairs, Chairs and Tables needs at most 15–20m3permonth. The birch wood is bought at favourable pricescompared to prices in the world market. Of DOP’scapacity of approximately 30,000m3 of sawn birchwood, Chairs and Tables buys only 150–200m3;however, Chairs and Tables buys from DOP on aregular basis. The factory manager is in contact withDOP five or six times per month and usually buys woodat biweekly intervals.

6.3. The relationship between Russkiy Dom and its

supplier Sunset (Case 3)

Sunset is Russkiy Dom’s biggest supplier, has a largesawing capacity, and is surrounded by top quality pineforest, while Russkiy Dom has the resources available fortransportation and drying. Russkiy Dom has such largeturnover that the volumes of wood demanded are big alsofrom the point of view of Sunset. The drying capacity isthe bottleneck in Russkiy Dom’s production, whichplaces high requirements on the supplier’s ability to meetits delivery time. The volumes for the production of

glulam are mainly limited by the wood drying capacity,but the demand has so far not motivated an expansion ofthe capacity to dry. The deputy managing director isresponsible for purchasing and solves the practicalissues concerning the deliveries. An engineer who is alsoresponsible for the transfer line for the production ofglulam supports him. Russkiy Dom’s financial depart-ment manages the administrative activities. The deputymanaging director’s close relationship to the managementat Sunset gives high priority to Russkiy Dom, which wassignificant when Sunset started to apply specific norms tothe quality of the wood. Russkiy Dom regularly buyspine wood from Sunset. Sunset’s capacity amounts toaround 110,000m2 per year. In 1994, Russkiy Dom’stotal volumes purchased from Sunset amounted to 10%of Sunset’s total capacity and represented a significantlybigger share of its turnover.

6.4. The relationship between Red Star and its supplier

LesProm (Case 4)

Red Star is the biggest producer of building material ofwood in the region. The purchasing of timber is of greatimportance, since it accounts for 70% of the consumablesupplies. The purchasing manager is responsible for allpurchasing activities, but the managing director alsotakes part in the purchasing of wood. Red Star purchasestimber from deciduous and pine forest. Every month, thepurchasing department receives a production plan fromthe manufacturing department. There are predeterminednorms, specified by the accounting department, illustrat-ing the material to use and the quantity needed for aspecific product. Fluctuations in the demand for RedStar’s products make it difficult to make forecasts, so thefirm avoids having a stock of products and onlymanufactures directly to order. Red Star’s biggestimportant supplier is LesProm, which cuts 200,000m3

of forest annually. LesProm is situated in the north-western parts of the region, which guarantees timber ofaverage quality and of northern pine of compact quality.This is sufficient for Red Star. Red Star purchases 15–30truckloads with timber each month, which is approxi-mately 15% of LesProm’s timber production. Thegeneral director and his two deputies meet regularly withrepresentatives from LesProm. Representatives from thefirms meet about once a month, usually at Red Star.Between meetings, the two firms have contact by phonetwo or three times per week.

7. Cross-case analysis

7.1. Order of the activities in the activity chain

In contrast to the observation that a homogeneousactivity structure prevailed as a result of the planned


economy and that the activity chains in the variousrelationships should be the same, the cases demonstratealmost four different orders of activities. The eight firmsinvolved in the relationships have organised the activitiesin different ways (see Tables 2–5). While, for instance, inCase 1 the chain begins with quality control and payment,these two activities are in the other three cases performedat other positions in the chain. The cases do not indicatewhether this is a result of decentralisation and deregulationor if this was the situation also before the transitionstarted; however, one can observe that firms organisethe activities with their suppliers in different ways. Thedifference between the locations of the activities in thechain seems to be valid for all the activities, but, in spite ofthese differences, there seems to be some activities that areusually performed in a specific order. The four activities(sawing to standard size, drying for transport, drying to12%, and sawing to special size) are in the four casesperformed in a specific order, where one activity isdependent on the fact that another activity has alreadybeen performed and that a third is following. But thesefour activities are in different ways interrupted by qualitycontrol, transport, and payment, indicating that theseactivities are not so dependent on the first four activities.On the other hand, it seems that the second

observation still is valid. The customers in the casesstill perform the lion’s share of the activities. In mostcases, the supplier saws to standard size, while drying to12% and sawing to special size are usually performed bythe customer. Three activities are more heterogeneouslydistributed among the customers and suppliers, but it isstriking that the customer is so active in the relationship.For instance, payment, quality control, and transportare to a large extent executed by the customer. Thesuppliers’ marketing strategy seems still to be ‘‘If youwant it, come and get it’’, which does not always meanthat the wood is dried for transport. In two of the cases,the suppliers Sunset and DOP perform this activity. RedStar performs all the drying activities, while in Siderov &Co’s case both the customer and the supplier performthe drying for transportation.These observations are probably the reason why the

firms’ boundaries in the relationships in the cases aredifferent, which may be a result of the firms’ ability andfreedom to organise their activities in their own way,despite being governed by plan and plan authorities.This could also be a consequence of the deregulation ofthe economy and the extended freedom to organise theiractivities in a more heterogeneous way, depending onthe firm’s strategy.

7.2. Interfaces between the activities in the chain

In general, the cases indicate that the interfaces in theactivity chain are not always characterised by mutualadaptations. However, there are three interfaces where

the activities seem to be mutually adapted. The firstinterface where activities are mutually adapted is the onewhere the wood is transported and the quality of thewood controlled. In Cases 1 and 2, quality control is aprecondition for payment, and these activities aremutually adapted, since the price is dependent on thequality. The second interface, with mutually adaptedactivities, is the one where the quality is controlled andthe wood subsequently transported, as in Cases 1–3.Quality control is applied twice in these three cases,since both the supplier and the customer check thequality, and it appears that quality control is a necessaryactivity before the customer dries the wood to 12% andafterwards saws the wood to special size. Thus, theinterface between quality control and drying to 12% isoften mutually adapted as well. The final mutuallyadapted interface is where first drying to 12% and thensawing to special size are performed (Cases 1–3). Dryingto 12% is not only a precondition for sawing the specialsize, but is only in such a way that sawing to special sizeis easy to perform. For the first two of these fourobservations, the mutual adaptation is located where thefirms’ boundaries meet, while the third and fourthinterfaces—quality control and drying to 12% anddrying to 12% and sawing to special size—are located atthe customer level, which strengthens the propositionthat the mutually adapted interfaces in the chain are tobe found at the customer level.

7.3. The relationship as an activity link

The activity chains in the cases run from the supplierto the customer. Although one can observe fewinterfaces with mutually adapted activities, two activitieshave been adapted not only to the activity that precedesor follows, but also to more unspecified and generalneeds. Payment and quality control are the onlyactivities that have undergone changes, as they are notonly adapted to another specific activity, but also to therelationship as such. The activity that seems most easyto change is payment, which corresponds to findings byAukutsionek (1998) and Poser (1998) that barter is acommon way to handle exchange between firms. Inthree of the cases, rather unusual ways of paying areevident. Avoiding taxes, personal gain, and financialrecession influence the payment; in two of the cases thefirms are engaging in barter trade, and in the third casethe payment is an illegal source of ready money for a fewpeople from the supplier.Moreover, in two cases, customers Russkiy Dom and

Chairs and Tables have convinced the suppliers toperform the quality control of the wood, whichinfluences not only the following activity, but alsoseveral other activities in the activity chain. In boththese cases, even and sufficiently high quality isnecessary for the customers’ end product.

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Table 3

Analysis of the activity chain in DOP–Chairs and Tables (Case 2)

Table 2

Analysis of the activity chain in Rubin–Siderov & Co (Case 1)M

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Table 5

Analysis of the activity chain in LesProm–Red Star (Case 4)

Table 4

Analysis of the activity chain in Sunset–Russkiy Dom (Case 3)M

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Long-term relationships are usually viewed as char-acterised by cooperation and collaboration (Andersonand Narus, 1990), which, in turn, means that the firmsoperate in integrated and sophisticated ways (Cousinsand Spekman, 2003). However, the cases demonstratethat relationships in transition economies can be bothimportant and long-term for the firms involved, butmay not necessarily mean that the activities performedare integrated. There are probably at least two reasonsfor the relatively few examples of adaptations in thefour cases.

First, it seems that the firms are reluctant to makeadaptations and thereby to become dependent onspecific customers, which is in line with other transitioneconomies (Djeflat, 1998). Having lived for decades inan economy characterised by firms being unilaterallydependent on the authorities, their reaction to theinstitutional changes is probably to use the freedom andavoid making adaptations in order not to becomedependent on the supplier. Moreover, the weak contractenforcement that has emerged as consequence of theinstitutional changes, is likely to decrease the firms’willingness to become dependent on specific suppliers. Itcan therefore be expected that, instead of letting thesupplier perform an activity, the customer prefers tointegrate an activity vertically in order to have controlover the value that the activity produces (Zaharievaet al., 2003).

Second, activities are not only related to each other,but also to the resources used to perform the activities.Changing and transforming parts of the activity chaincan thereby only be made through investment in newtangible or intangible resources. In Russia, where manyfirms have experienced severe financial constraintsduring the transition, it is more difficult to invest innew machines and equipment than to change qualitycontrol and payment, which is not connected to costlyinvestment.

Russian Supplier

Foreign CustomerActivity Hole

Russian Customer

Performed activity

Non-performed activity

Fig. 2. The activity hole between supplier and customer.

8. Discussion

In addition the observations related to the Russiancontext, the cases also have some general implicationsfor theory development. On a micro level, relationshipsare often multidimensional, and although they can beseen to represent a specific type of governance mode,there can be differences among the relationships, even ifthe same product is supplied. Moreover, a relationshipcan contain various activity chains, depending on theproduct supplied, and since a relationship sometimescomprises the exchange of more than one product, arelationship can probably be both relational andtransactional to its character from an activity point ofview; that is, one product may be supplied through anactivity chain characterised by mutual adaptation,

whereas a second product is purchased through a chainwithout mutually adapted activities.From this follows that an activity link in a relation-

ship can vary from a wide to a narrow range of mutuallyadapted activities. For instance, while in some casespayment, production, transport, and storing can belinked to the counterpart, one can also expect that inother relationships, few activities are linked to eachother. Firms may come to a specific agreement on howto conduct the payment, while the other activities arestandardized and homogeneously performed throughthe relationships. Moreover, this means that it is notnecessary the adapted activity is the last one in a chain.The strong activity link can instead be located at thebeginning or at the end of the chain, but being of suchan importance for the relationship that it links the firmsto each other.

9. Implications for managers—managing holes and links

An important observation made in this study is thatit is likely that activity chains, orders of activities, andfirm boundaries in Russia differ from those in maturemarket economies. For instance, the customer in Russiacustomarily performs several activities usually per-formed by the supplier in Western market economies.In contrast to the pilot studies (Andersson, 1997; Funkeet al., 1997), the activity chains differ between them-selves, but moreover, the customers dominate therelationships. One of the reasons for this situationmay be the risk of emerging holes in the relationships(Fig. 2). This risk may cause problems for Western firmsentering the Russian market, since the foreign andRussian structures are not compatible, that is, Russiansuppliers often do not perform several of the activitiesthat Western customers expect from their domesticsuppliers. This means that Western firms have toreconsider their supply management in the Russianmarket. However, the activity holes can also occurbetween Russian suppliers and customers and therebyhamper the reorganisation of activities in relationshipsbetween Russian firms. Although activity holes seem to


be a constraint for both foreign and Russian customers,they also create opportunities for existing customers andsuppliers as well as for other firms, which are able toidentify and fill the activity holes.There are generally three ways to manage these issues.First, the customer performs the needed activities. For

the foreign customer firm this can lead to costlyinvestments in machines and equipment. Moreover,since the activities often are not part of the firm’s corebusiness, the firm has to learn to perform the activityand to integrate the activity into the activity chain. The‘‘do-it-yourself’’ strategy seems still to be the dominantone among Russian firms. Integrating backwards was acommon strategy for the customer firm in the period ofshortages in securing supplies in the planned economy,and control over crucial activities still seems to be themain strategy in order to reduce the perceived un-certainty about supply.

Second, both the foreign and Russian customer firmcan try to convince and teach the existing supplier toperform the activities. This strategy implies investmentand a learning process, but for the Russian firm, whichusually experiences financial constraints, operating in amarket of few firms, weak contract enforcement, andshort time horizons, where mitigating mechanisms likereputation and trust are absent (Blanchard and Kremer,1997), this renders the firm reluctant to becomedependent on a specific counterpart.

Third, a third party may fill the hole with the activitiesneeded (Burt, 1992). This can either be done by aRussian firm filling the activity hole or by anotherforeign firm following the customer to the Russianmarket. Whether the foreign firm will manage to attracta foreign supplier to follow is likely to depend on thenature of the hole and the type of activity that ismissing. Suppliers following customers abroad areusually also reluctant to make big investment in themarket (Majkgard and Sharma, 1998). It seems that themore tangible the resources used by a firm, the morereluctant it is to make investment in the market(Erramilli, 1990). Thus, it seems easier to attract asupplier of less tangible and softer goods or services tofollow the customer to the foreign market than aproducer of tangible products. However, irrespective ofwhich of these strategies are chosen, all require extensiveinformation, initiative, and investment.In the light of these strategies, supply management

during the transition to market economy can be viewedas a process where the customer and supplier con-tinuously have to identify and fill the potential holeswith activities which are valued by the counterpart; itseems that this is one of the reasons why payment andquality control are salient issues in the case. Theyproduce value for the counterpart, not only for thecustomer, but also for the supplier, and not only intransition economies, but also in market economies.

Consequently, they deserve more attention from pur-chasing and supply management researchers.

10. Implications for research

This study is founded on four cases from the Russiantransition economy, and it builds on ideas developed byDubois (1998) and Hakansson and Snehota (1995). Inaccordance with the ideas of these researchers, it focuseson the supplier relationship as a structure, which here isviewed as a chain of activities. This focus leads on toseveral new research questions. The first one concernsthe dynamics of organising the activities in supplierrelationships. How and why activity chains are modifiedand transformed as a result of changes in the business orinstitutional environment seems to be a promisingresearch area in dynamic industries as well as ineconomies subject to extensive transformation. As adynamic concept this issue is strongly related to supplymanagement in general and outsourcing in particular,since a processual approach is fruitful for studies of howfirms go from outsourcing to insourcing and vice versa,depending on the nature of the industry or institutionalframework.The concept of the activity hole is closely related to

changes of activity chains in supplier relationships. Thepresent study employs the activity hole as theoreticalconcept, which may contribute to understanding whychanges of activity chains take time. I suggest alongitudinal and processual study to develop anoperationalisation of the activity hole concept in orderto observe phenomena that correspond to the conceptand to measure them.Other fruitful research areas are related to the topics

identified in the discussion section above. As in thestudies by Dubois (1998) and Richardson (1972), thisstudy deals with relationships where just one product issupplied. The complexity of the activity chains in therelationships increases if the customer buys more thanone product, and especially if the products are ofdifferent character. This also opens up situations wherea relationship may incorporate several activity chains.The balance between the complexity of the differentchains of activity performed in the relationships andnature of the products bought by the customers is likelyto influence the firms’ opportunities either to integratevertically or to outsource activities. In the same way, itseems that the governance mode is not always deter-mined by the activity performed last in the chain. If so, itprobably has an impact on the customer’s make-or-buydecision. Thus, Richardson’s (1972) idea on the activ-ities performed in the relationship can offer analternative approach to the analysis of make-or-buyissues, but much work on the complexity and dynamicsof the activities still remains to be done.


Acknowledgement

I am grateful to Lars-Erik Gadde for valuablecomments on an earlier draft version of the paper.

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Chains, holes, and links: Organisation of activities in supplier relationships in the Russian transition economy

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