Creating Maximum Value Requires System ThinkingIn the Fall 2008 issue of the MIT Sloan Management Review, Maxim Sytch, a lecturer at Northwestern University's Kellogg School of Management, and Ranjay Gulati, a professor at the Harvard Business School, provide an overview of their research on the relationship between the mutual dependence of a supplier and a manufacturer, and the firms' business performance.1
The key finding is that it is a mistake to think, as many do, that value appropriation is the only relevant process. I.e., it is not the case that the way in which the supplier and manufacturer divvy up the value they create is determined entirely by their degree of dependence asymmetry "how much more (or less) one company is dependent on its business partner than vice versa."
Sytch and Gulati hypothesized that joint dependence "the extent to which two companies mutually depend on each other" was also important. In other words, in reaching their decision on dividing up the value they create, the manufacturer and supplier would factor in the potential for increasing the total value. Using data from the automotive industry (Ford and Chrysler, to be specific), Sytch and Gulati found clear support for this hypothesis.
By deliberately building a relationship that involves both joint action in such areas as design, cost control, and quality improvement, and also the sharing of detailed, accurate, and timely information, manufacturer and supplier are able to enhance the performance of the procurement relationship. Performance is measured by such factors as price competitiveness, product quality, product innovation, and defect rate.
The bottom line: Managers should think systematically about dependence in interorganizational relationships. Because there are benefits to mutual dependence, "striving to maximize power in a buyer-supplier relaitonship can have a negative impact on a company's performance."
1 The text of the published version of Sytch and Gulati's research is here. This version provides a full explanation of the research methodology.