Social exchange theory, largely grounded in sociology and social psychology, posits that interfirm relationships are motivated by personal interests and the expectation of possible outcomes (Lambe et al. 2001). These outcomes can be either economic/tangible (e.g., goods and money) or non-economic/non-tangible (e.g., amenities and friendships among managers). An interfirm relationship can be defined as a process where two firms (or two other types of organizations) form ‘strong and extensive social, economic, service and technical ties over time, with the intent of lowering total costs and/or increasing value, thereby achieving mutual benefit’ (Anderson and Narus 1991: 96). This broad and well accepted definition of IRs shows the degree to which these relationships are oriented towards expected outcomes and value creation.
The concept of value creation is especially relevant to the study of IRs because it encompasses traditional success indicators (e.g., customer value, performance, profitability, and competitiveness). Yet, because of the very breadth of the term ‘value,’ there is little agreement in the literature on a definition for value creation. Research in strategy, product and service marketing, consumer behavior, organizational behavior, and psychology has developed several varied concepts and measures of value, such as the ‘augmented product’,
‘customer satisfaction’, or the extensively used ‘value chain’ (Payne and Holt 2001).
Simply put, value is a measure of importance as perceived by stakeholders, and value creation is a process that generates and returns valued assets to stakeholders. Thus, value creation enables shareholders to obtain returns on investments from a financial perspective;
it enables customers’ needs to be met from a marketing standpoint; and it leads to the development and maintenance of a competitive advantage from a strategic perspective. A literature review conducted in six business research disciplines dealing with value-creating activities (Porter 1985) illustrates this diversity in IRs outcomes.
To begin with, the literature culled from the field of research and development often approach IRs as tools favoring innovation (Hausman and Stock 2003), new product development (NPD), and the adoption of new technologies (Burdock et al. 2001; Ragatz et al. 1997). In the fields of logistics and production management, efficient relationships with suppliers and customers are not only presented as innovation facilitators (Primo et Amundson, 2002), but also as enhancers for product customization (Salvador and Forza 2004), supply chain management (SCM) (Gassenheimer et al. 1989; Horvath 2001;
Spekman et al. 1998), and time-based strategies, such as just-in-time (JIT) activities, quick response (QR), and efficient consumer response (ECR) (Kim and Ha 2003). In the field of organizational information systems, many studies focus on how Internet-based technologies can help interfirm relationships with respect to supporting supply chain management and business-to-business (B2B) electronic commerce (Shapiro 2001; Subramani 2004). The area of industrial marketing is now being supplemented by an emergent paradigm,
‘relationship marketing,’ in which long-term and interactive relationships are favored in order to foster improved performance of channel partners (Gummesson 2004; Sharma et al.
1999). The field of marketing also offers many of the previously mentioned perspectives, such as innovation (Roy et al. 2004) and supply chain management (Alvarado and Kotzab 2001; Myhr and Spekman 2003), as means of value creation. The literature in marketing also emphasizes customer orientation (Jaworski and Kohli 1996; Narver and Slater 1990) and contributes to the development of tools such as customer relationship management (CRM) (Payne and Frow 2004). Furthermore, the area of marketing provides a wealth of literature on the development and enforcement of contracts and norms leading to successful interfirm relationships (Antia and Frazier 2001). Finally, the field of strategic management is concerned with showing how strategic networks, partnerships, alliances, joint ventures, and cooperative interfirm relationships are major sources of competitive advantage (Gulati et al. 2000; Jarillo 1988).
Studying IRs from so many perspectives leads to confusion regarding their outcomes. The emerging literature about ‘relationship value’ in business markets provides helpful insights to structure the multiplicity of benefits attributed to IRs. Notably, Ulaga and Eggert (2005) have assessed that IRs generate benefits with regard to: (1) products; (2) services; (3) delivery times and times-to-market; (4) knowledge and know-how; and (5) personal interactions within the exchange process. These dimensions corroborate the findings of the cross-disciplinary literature review conducted in this paper and are, therefore, used to clarify perceptions of the value created by IRs (Table 5).
Table 5 – Indicators of value creation in interfirm relationships Benefits Indicators of value creation
(1) Products Facilitated product customization and mass-customization; improved product reliability, quality and profitability; improved product line availability
(2) Services Improved customer service quality, reactivity and reliability (3) Delivery
times and time-to-market
Enhanced new market penetration and market expansion; efficiency of distribution; distribution coverage; on-time delivery; flexibility;
rapidity/time to market; responsiveness; on-time reception of purchased material in quantity and quality; agility in production; reduced order cycle times; rapid and accurate order processing; cost efficient inventory management; timely restocking and rotation
(4) Knowledge and know-how
Enhanced access to missing resources, competences and new
product/process technologies; innovativeness and integration of new technology; new product development; optimization of existing resources; improved learning and know-how; facilitated market knowledge; competitive pricing activities
(5) Personal
interactions Problem solving orientation; relationship satisfaction; personal recognition; enhanced decision making
(Adapted from Ulaga and Eggert 2005)
The value of interfirm relationships tends to be studied along supply chains using various concepts such as ‘expected-value’, ‘desired-value’ or ‘perceived-value’, and from both the customers’ and the suppliers’ perspectives (Beverland and Lockshin 2003; Hogan 2001;
Showalter et al. 2003). The assessment of relationship value is usually based on a trade-off between generated benefits and costs in a relationship. The widely used transaction cost analysis states that transaction costs include not only direct costs involved in a relationship (e.g., the price of the purchased product or service), but also indirect costs (e.g., searching for information, reaching a satisfactory agreement, monitoring relationships, adapting agreements to unexpected contingencies, and enforcing contracts) (Wulf and Odekerken-Schröder 2001). In the literature on relationship value, the price paid is also included in the relationship’s costs but is rather viewed as a ‘sacrifice’ (when too low for the supplier or too high for the customer) made to ensure the continuity of a beneficial relationship.
Additional costs have also recently been integrated into the evaluation of IRs using a terminology that is not yet standardized. Thus, costs incurred by customers in acquiring and storing products, in coordinating activities with suppliers, and in adapting the purchased
material to the transformation process are either labeled ‘acquisition costs’ or ‘external process costs.’ Costs inherent to the firms’ primary business (e.g., handling, and machinery repair and maintenance) are also taken into account and are labeled ‘operation costs’ or
‘internal process costs’ (Cannon and Homburg 2001; Ulaga and Eggert 2005).
Although value creation in interfirm relationships is usually assessed using a ratio or comparison between associated benefits and costs, outcomes of IRs ought to be considered more broadly. Indeed, possible negative outcomes of IRs and the potential for conflict and vulnerability in these relationships cannot be dismissed. It has been clearly established that economic and non-economic satisfaction provided by IRs is negatively affected by coercive power and conflicts (Gaski and Nevin 1985; Geyskens et al. 1999). Furthermore, vulnerability can emerge from ‘dependence on real time connectivity, channel balance of power, strategic integration, information sharing, and investments in technology’
(Bowersox et al. 2000: 14). Along with the introduction of extranets, electronic procurement systems, and other information technology applications, security issues related to information sharing have become more and more important in IRs. Finally, some supposedly beneficial outcomes of IRs can, in fact, harm the parties involved if governance mechanisms are not appropriate. For instance, organizational learning in interfirm exchange relationships can lead to an inadvertent and unwanted transfers of skills between partners, resulting in the potential dilution of competitive advantage (Mohr and Sengupta 2002).
In summary, given the breadth of and variation in IR literature, the present study proposes to conceptualize the outcomes of IRs in a framework incorporating positive dimensions (value creation) and negative dimensions (value destruction) dimensions. The literature suggests that these dimensions essentially vary according to three other key elements of IRs: their nature, their governance mechanisms, and the business environment in which they are taking place. Each of these elements is presented in turn in the next sections. Links between these elements are subsequently discussed.