Opportunism in supplier-buyer relationships

Diplomarbeit von Sebastian Schulte

Abstract:

In 1996, managers of U.S. based automaker Ford Corporation realized that they had been fooled: The decision to allocate the company’s seat construction to the single supplier Lear Corporation had turned out to be a disaster. Lear had made unrealistic promises concerning their engineering talent in order to get into business with the major carmaker. As Ford was locked-in with a supplier that was unable to keep deadlines and that produced parts that did not work, the production and on time launch of the 1996 version of Ford Taurus were severely put at risk.

In this industry example, the supplier behaved opportunistically towards the buyer by misrepresenting the true skills of its employees. According to Transaction Cost Economics (TCE), opportunism is considered as an endogenous factor – it forms an inherent part of business relationships. Following Williamson’s explanation, opportunism is one of the „rudimentary attributes of human nature”. Whenever individuals will be given the chance to act opportunistically, they will do so.

However, taking a look at current literature, the classical view of opportunism as a „ubiquitous phenomenon” becomes unsustainable. The emergence and degree of opportunistic behaviour is influenced by a variety of antecedent factors, such as institutional environment (e.g., competition, technology), or social determinants of behaviour (e.g., commitment, trust). Psychological research on this topic has shown that TCE lacks an explicit distinction between opportunism as an attitude and as a type of behaviour or action. Whether an agent behaves opportunistically or not does not only depend on his inclination towards carrying out unfair business practices, but also on the incentives that are given to him. Furthermore, recent approaches drawing on Agency Theory have replaced the traditional model of a self-serving man by an agent showing cooperative behaviours, as described in Stewardship Theory.

In his original version of TCE, Williamson relied on vertical integration as an effective governance mechanism to attenuate opportunism and to safeguard specific investments. Transactions with high asset specificity should be governed by hierarchy mechanisms that are not accessible to markets, such as intensive monitoring or incentive structures. As a result, transaction costs would be minimized. In fact, hierarchical controls should not be treated as a universal remedy to curtail unfair business practices – they may yet cause the opposite effect. The continuous allegation that a partner might behave dishonestly might become a „self-fulfilling prophecy, whereby opportunistic behaviour will increase with sanctions and incentives imposed to curtail it”.

In addition, markets and hierarchies are only „polar ends of a continuum of governance options”. A great number of governance mechanisms that are „neither markets nor hierarchies” are visible in modern business relationships, such as industrial buyers sharing close ties with their independent suppliers. These relationships are considered as „relational exchanges”. Due to its assumption of opportunism, TCE is „not able to account for complex non-market governance modes between nominally independent firms”. Williamson completely blinds out the environmental and social factors that influence the emergence of opportunism and solely attributes unfair business practices to the „human factor”, that is, the „opportunistic man”. Thus, by applying TCE logic, industrial buyers will not be able to efficiently counteract supplier opportunism, since the theory lacks relevant insights into mechanisms through which opportunism is created or reduced.

The target of this paper is to provide a deep insight into the opportunism construct. The analysis will break with the traditional view of opportunistic behaviour as an endogenous and ubiquitous factor in business relationships. It will consider opportunism as a dependent variable that is subject to several influences. By examining the antecedents which drive opportunism, its theoretical foundation within TCE and Agency Theory will be challenged. Focus of analysis will be vertical market relationships, in particular supplier-buyer dyads.

The consideration of opportunism as an exogenous factor will be effective in a practical sense: Knowing about the determinants of opportunism, buyers will dispose of a „tool box” in order to curtail opportunistic behaviour of their suppliers. This tool box consists of implications that will be extracted from studies that have regarded opportunism as a dependent variable. Taking into account that the decision between making or buying a product is characterized as a trade-off between production and transaction costs, and that the latter is influenced by the degree of opportunism, the key question then becomes: May the buyer utilize this knowledge in order to determine the boundaries of business activities more efficiently, that is, deciding for a governance structure capable of minimizing transaction costs?

From the buyer perspective, an improved governance structure will serve a dual purpose, for it is able to reduce supplier opportunism and, at the same time, to minimize transaction costs. The discussion will provide an overview of mechanisms that are commonly used to curb supplier opportunism. These will be analysed in the light of „variable opportunism”. The question is whether the acknowledgment of the latter might lead to the development of more effective governance mechanisms that serve to attenuate partner opportunism.

Ultimately, the implications drawn from the tool box will be analysed in terms of a current market scenario, in which high market consolidation (e.g., mergers and acquisitions, private equity investments), rapid technological change (e.g., shorter product life cycles), and growing globalization run rampant.

This paper starts by defining the area of application for the subsequent analysis, that is, supplier-buyer dyads within a relational exchange scenario (Chapter 2). Chapter 3 will then give an overview of forms and outcomes of opportunism. In chapter 4, the theoretical fundament for the course of analysis will be laid, by providing insights into how opportunism is positioned within TCE and Agency Theory. TCE’s and Agency Theory’s assumption of a ubiquitous opportunism will be challenged in Chapter 5.

The Opportunism Tool box, serving as the framework of this paper’s analysis, will be introduced in chapter 6. Chapter 7 forms the main part of this thesis, since it summarizes the antecedents that lead to the emergence of opportunism. These determinants will be consolidated in the opportunism tool box and will be structured within a collection of safeguarding mechanisms.

Ultimately, in chapter 8, the implications that have been drawn from empirical evidence will be transferred onto a current market scenario. A fictional supplier-buyer dyad will be constructed for this purpose. Due to high availability of market data, the automotive industry was chosen as object of investigation. Chapter 9 then summarizes the results of the preceding chapter, followed by the general conclusion and managerial implications in chapter 10.

Table of Contents:

Table of Contents:

Text Sample:

Centralization describes to what extent decision-making authority is concentrated. As noted in chapter 4, full decision control of one party over the other equals vertical integration. However, companies may achieve —quasi-integration“ by maintaining high levels of control over business partners. Thus, studies that dealt with the effects of centralization on opportunism will be added to the chapter about vertical integration. Finally, the dimension control refers to the use of monitoring procedures.

By writing a precise contract, companies might enhance decision control over business partners, even in the absence of vertical integration. Terms of trade become legally enforceable, and courts may be used to force parties to perform in accordance to written down agreements. Yet according to TCE, the efficacy of detailed contracts in mitigating opportunism is limited, since they are not able to account for all future contingencies. Empirical research corroborates TCE reasoning: In a recent study conducted with Dutch purchasing managers, Wuyts and Geyskens (2005) have proven detailed contracts to be inefficient in reducing partner opportunism.

Regarding the relationship between U.S. manufacturers and their independent foreign distributors, Cavusgil et al. (2004) have come to similar results: The authors demonstrate that distributor opportunism does not decline at higher levels of contractual precision. Finally, Achrol and Gundlach (1999) have shown that higher levels of decision control that are granted to one party through contractual safeguards will not reduce opportunism by the other.

Regarding vertical integration and high centralization, results drawn from the study sample largely confirm their positive effect on opportunism. In his path-breaking work, John (1984) proved that franchisee opportunism is likely to increase with the extent of centralization (i.e., quasi-integration) imposed by the parent company.

His results were backed up by Dwyer and Oh (1987), showing that centralization and non-participation —jeopardize relationship quality“ in dealer-supplier relationships. In terms of dealer-supplier relationships, Provan and Skinner (1989) proved high supplier control over dealer‘s decisions to increase dealer resistance against centralization, thus fostering opportunistic acts.

Finally, an analysis of the relation between hotels and their headquarters concluded that full vertical integration will initiate the cycle of self-fulfilling prophecy and fuel opportunistic behaviour on the hotel part. However, two studies correspond to TCE reasoning. First, Anderson‘s (1988) analysis of integrated and independent sales forces demonstrated that the independent ones displayed higher levels of opportunism than their company-owned counterparts. In his analysis of marketing researchers, Kelley et al. (1989) came to identical results, showing that employees of corporate research departments are less opportunistic than their colleagues of data subcontractor organizations.