In buyer-supplier relationships in which companies depend on one another, performance may improve.
Conventional wisdom suggests that companies should avoid growing dependent on their business partners. If one company, the thinking goes, grows too dependent on a counterpart by getting the entire input for a particular activity from it and not being able to switch quickly to alternative sources of supply, then the counterpart company gets powerful levers of influence. By threatening to exit the relationship, the supplier may then renegotiate the relationship toward more favorable terms and claim a bigger share of the economic pie. And this bigger share will come at the purchasing company’s expense.
Is dependence on another company bad, then? Not necessarily.
While seemingly intuitive, the conventional wisdom fails to realize that there are not one but two critical processes that affect how a company fares in a business partnership. One is indeed value appropriation, in which each company’s performance is determined by how much value it captures from the pool of value generated by the partnership. But to capture value, companies first need to create it, and this is where the second process comes into play: value creation. In other words, what matters for a company’s performance in a buyer-supplier relationship is not just the share of the pie it gets, but also how big the entire pie is.
Our research suggests that, if smartly managed, dependence on one’s business partners brings significant benefits to value creation in interorganizational relations; it can boost the overall pool of value to be distributed and, subsequently, the performance of a company. Dependence, therefore, should not be avoided but actively harnessed. We also show that ineffective management of dependence may just as quickly shrink the value in the exchange, hurting all companies’ performance in the relationship. In that respect, relying on a tug-of-war — in which the more powerful company tries to squeeze out value at the expense of its more dependent partner — is particularly detrimental. It results in the dominant partner claiming a bigger share of a rapidly shrinking pie. Remarkably, in such circumstances, a more powerful business can be left with a net loss.
Our research method was two-pronged: We first conducted 37 interviews with managers and purchasing agents working in the automotive industry. We then analyzed survey data on 151 buyer-supplier relationships in the automotive industry, looking at manufacturers’ and suppliers’ dependence on each other in terms of a variety of factors.