The ties that bind: Buyer-supplier relations in the construction industry

https://doi.org/10.1016/j.pursup.2006.03.001Get rights and content

Abstract

This study considers the consequences of Inter Organisational relations at two levels: the micro level of the individual, and the macro level of the organisation. Merging Transaction Cost Economics with theories on the Social Embeddedness of relations, the paper tackles several hypotheses about problems in buyer–supplier relations. We amend the general hypothesis, as has been put forward by other researchers, that having a common past in combination with an expected common future in business will reduce the likelihood that problems and conflicts occur. Our focus lies on whether this shared past and future can preclude problems better when the organisational relations are at the micro level. Our analyses of survey data from 448 contractor–subcontractor relations from the contractor's perspective in the construction industry reveal mixed support for effects of a shared past or future. We hardly find any of the expected positive effects of a shared past on supplier performance. However, we do find support for the hypothesis that a larger likelihood of future business with the same business partner has a stronger (negative) effect on the occurrence of problems if the expected future business is at the level of individuals (instead of at the level of organisations).

Introduction

In many studies on inter-organisational relationships, researchers refer to the so-called shadow of the past and/or the shadow of the future (e.g. Heide & Miner, 1992; Heide & Stump, 1995; Batenburg et al., 2003). Both are considered part of what is called the temporal embeddedness of a relationship. Under the shadow of the past, past experiences with the other party are assumed to play their role in determining the type of behaviour towards that party. The shadow of the future is largely determined by the expected likelihood that partners meet again in the future. The general gist of the argument is that, in case of high temporal embeddedness, opportunistic behaviour is assumed, ceteris paribus, to be less likely. Learning from the partner's behaviour in the past enables more effective and efficient selection and planning, while an expected common future induces control, because of the possibility for the other party to retaliate; ‘tit-for-tat’ (I will treat you as you treat me).

Although in theoretical experiments temporal embeddedness seems to have a positive impact on cooperation (Axelrod, 1984), many empirical studies found only partial or even a total lack of support for this claim. Elsewhere (Welling and Kamann, 2001, Welling et al., 2003; Kamann and Welling, 2004), we pointed at a possible cause for this lack of support. Most studies look at inter-organisational relations only at the organisational level; that is, they do not check whether indeed Mr A of Company 1 is likely to meet Mr B of Company 2 again in the future, but only whether Company 1 is likely to do business with Company 2 in the future, irrespective of the identity of the actual individuals involved. We can illustrate the usefulness of distinguishing individual or micro level contacts from macro or organisational level contacts by looking at the construction industry. In the construction industry, the project leader and/or foreman play a very important role in (a) the supplier selection part of the purchasing process; (b) the day-to-day contacts and progress of the construction project. Especially in cases where the sub-contractor's services are interwoven with the processes of the construction project as a total project, project leaders have an important say in the supplier selection. One of the reasons for this is that in these cases, lack of cooperation at the micro level immediately results in additional project costs. In combination with this, another reason for the distinction is that, as Welling and Kamann (2001) demonstrated, in many industries in which deals are often project based—such as the construction industry—individual actors such as project leaders do not necessarily meet the same person they have done business again, even in cases where the two companies do collaborate again at an organisational level. Our hypothesis is that from a theoretical point of view it matters whether we study inter-organisational relations from the level of the individual—the micro level—or from the level of the total organisation – the macro level. Similarly, other levels in between could be identified, such as the level of Business Units or departments: the meso level. The point is that, necessarily, the more aggregate the level is, the less likely it is that actors have personal experiences with their counterparts. The more aggregate the level of interaction, the more important information systems are that store information about the reliability and general compliance of counterparts to expectations and contracts, common in an organisation. These systems might substitute personal memory and represent the organisational memory about third parties and the way they behave. To rely on these systems actually assumes that a third party will behave identically with everybody from the focal organisation we study, irrespective of personal favours or dislikes. In any case, the differences in the levels of aggregation across different studies is a possible explanation as to why some studies find effects of temporal embeddedness on business interaction, whereas others do not.

To deal with this issue from a theoretical point of view, a theoretical framework was developed (Kamann and Welling, 2004), combining the traditional transactional views of Transaction Cost Economics (TCE) with those of Social Embeddedness (cf. Buskens et al., 2003) and drawing from the ideas and studies of the GREMI-Group (Camagni, 1991) and the IMP-School (Axelsson and Easton, 1992). From this framework—to be summarised hereafter—a number of hypotheses are derived, with respect to the role of the temporal embeddedness, especially on combination with personal network relational embeddedness. Hence, our main question is whether the shadow of the past and the shadow of the future “work better” (in the sense that they prevent problems in buyer–supplier relations) when the inter-organisational relations are based on individuals instead of organisations.

We first discuss the theoretical framework employed: (1) the transaction cost economics and (2) the role of social embeddedness. The hypotheses are then formulated, where the centre of our attention is on the effects of the shadow of the past and the shadow of the future. Our base-line hypothesis is that a shared (positive) past and expected future business will decrease the eventual number and severity of problems in buyer–supplier relations. The next section describes the data set we used to test our hypotheses. The data consist of 448 contractor–subcontractor transactions in the Dutch construction industry. The conclusions and recommendations follow after the results of the analysis, employing both ordinary least squares estimation and 3-stage least squares.

Section snippets

Theory: transaction cost economics and social embeddedness

In Transaction Cost Economics (TCE), following Commons (1934), the (purchasing) transaction is the basic unit of analysis (Williamson, 1975). An economic governance structure is according to Williamson (1981, p. 1544) the explicit or implicit contractual framework within which a transaction is located. The original definition of transaction costs—‘costs of running the economic system’ (Arrow, 1969, p. 48)—could then be reformulated following Macneil (1981, p. 62) as ‘costs of running the

Hypotheses

As our dependent variable we consider the amount and degree of problems that occur in buyer–supplier relationships. Problem in the sense of “anything that delayed the construction project, increased costs or otherwise was not foreseen and experienced as normal business behaviour as to be expected”. TCE offers many independent variables that could have an effect on the amount and degree of experienced problems. In our empirical analysis we will indeed control for several characteristics of the

Data

As our sampling frame we decided to focus on the Dutch construction industry, for a combination of reasons. First, the construction industry is characterised by short-term inter-organisational relations between partners in construction (contractors, subcontractors, architects, etc). This poses high demands on mutual communication and coordination (Voordijk, 1994, p. 88). If we look at construction projects more closely, we see that these relations between organisations usually come about by a

Results

As our dependent variable, we consider the amount and degree of problems that the contractor and subcontractor were confronted with. After extensive consultation with experts in the field, we developed a survey that asked whether 23 potential problems had occurred (and whether they could in principal occur for this transaction), ranging from discussion about on time delivery, not meeting the agreed specifications, discussion about tidiness on the work site, and about not supplying the paper

Conclusion and discussion

We set out by stating—as others have done—that it would make sense to combine the strict economic interpretation of transaction cost economics with elements that introduce a relational character to cooperation between business partners. Our main focus was on the effects of temporal embeddedness: the effects of business partners having a shared past and/or expecting a shared future. Whereas most researchers have left the level of analysis for the temporal embeddedness largely implicit, we tried

Implications for practitioners

The main practical implication for practitioners lies in the emphasis on possible other ways, relational ways, to safeguard cooperation between business partners. Whereas it might be tempting to safeguard a transaction solely by “economic means”, such as through elaborate contracts and planning, it is worthwhile to explicitly take the relationship with the business partner into account. A mutual expectation of future business is a useful asset in the sense that it is less likely that partners

References (43)

  • J.R. Commons

    Institutional Economics

    (1934)
  • Constantino, N., Pietroforte, R., 2001. Subcontracting practices in USA homebuildings: an empirical verification of...
  • R. Davidson et al.

    Estimation and Inference in Econometrics

    (1993)
  • E. Durkheim

    De la division du travail social

    (1893)
  • D. Ford

    Understanding Business Marketing and Purchasing

    (2002)
  • Geerink, S.G.M., 1998. Project-independent cooperation—the solution to bottle-necks in construction? (in Dutch:...
  • M. Granovetter

    Economic action and social structure: the problem of embeddedness

    American Journal of Sociology

    (1985)
  • R. Gulati

    Social structure and alliance formation patterns: a longitudinal study.

    Adminstrative Science Quarterly

    (1995)
  • J.B. Heide et al.

    The shadow of the future: effects of anticipated interaction and frequency of contact on buyer–seller cooperation

    Academy of Management Journal

    (1992)
  • Jacobs, D., Kuijper, J., Roes, B., 1992. The economic power of construction. The need for a different culture (in...
  • G.L. Johnson et al.

    Exploring Corporate Strategy

    (1984/2002)
  • Cited by (35)

    • The effect of early supplier engagement on social sustainability outcomes in project-based supply chains

      2015, Journal of Purchasing and Supply Management
      Citation Excerpt :

      This has led to fragmentation and misalignment among organizations, and has been attributed to complex relationships and a “one-off” nature in which firms move from project to project, have low collaboration, and are seen as only responsible for their specific piece of the venture (Blayse and Manley, 2004). This type of environment presents an opportunity to research issues in how the fragmented supply network in “project-based, service-enhanced” supply chains such as construction can be better managed to improve sustainable outcomes by focusing on lifecycle influences of project performance rather than price-focused demand–supply interactions (Gann and Salter, 2000; Kamann et al., 2006). Lifecycle influences tend to be under-valued and addressed in the latter stages of the project lifecycle, even as research has shown the benefits of incorporating lifecycle-based factors earlier in the procurement process through early supplier engagement (Eriksson and Westerberg, 2011; Swan and Khalfan, 2007).

    • Strategic purchasing and supplier partnerships-The role of a third party organization

      2014, Journal of Purchasing and Supply Management
      Citation Excerpt :

      A lack of a history of prior ties may be a disadvantage since firms are known to prefer transacting business with those with whom they have had prior relationships (Gulati, 1995). In this respect, several studies on inter-organizational relationships have documented the fact that relationships are often based on prior ties (Larson, 1992; Kamann et al., 2006) with purchasing organizations more likely to do repeat business with those with whom they have had prior ties (Min, 2009). Indeed, the evidence on purchasing seems to support this temporal embeddedness of relationships.

    • Learning from suppliers in the aerospace industry

      2011, International Journal of Production Economics
    View all citing articles on Scopus
    View full text