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order to prevent the supplier from cheating on quality under conditions of uncertainty.
This line of research suggests one critical factor that drives the presence of price premium:
buyers’ desire for quality. However, this conclusion has limited practical implications for many emerging market suppliers since in some global industries, quality has become a necessary condition to compete in global markets and is no longer a sufficient condition to command price premium (Sheth et al., 2000). As many emerging market suppliers are located in industries where product/process technology has been standardized, the number of suppliers who are capable of providing products of good quality is growing and competition is increasingly intense. To obtain price premium, emerging market suppliers need to find other strategies.
3. Theoretical Development
In this section, we explore how emerging market suppliers can create values in the customer-supplier relationship (Sharma, Krishnan, & Grewal, 2001), raise their customers’
expectation of relationship continuity, and then increase the willingness of the customers to pay more favorable prices. The literature has suggested that a customer’s expectation of relationship continuity has an important influence on the magnitude of price premiums (e.g., Rao & Monroe, 1996). If there is only one-time transaction (or very infrequent purchase), the supplier has little incentive to maintain quality since the repeat “policing” mechanism does not apply; no price premium will be high enough to assure quality.
3.1 Customer’s expectation of relationship continuity
On the other hand, a customer is more willing to pay a higher price premium to a supplier if it wants to keep its relationship with the supplier going (Kumar, Bohling, & Ladda, 2003). In
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other words, a loyal customer is less sensitive to price changes; thus its supplier can command premium prices (Porter, 1985). A customer’s tendency of continuing cooperative relationship with a supplier, or a customer’s expectation of relationship continuity, reflects the desire of the customer to remain a long-term relationship with a specific supplier (Noordewier, John, & Nevin, 1990). It highly depends on the customer’s perception of interdependence of outcomes, in that both the supplier's outcome and the joint outcomes are expected to benefit the customer in the long run (Ganesan, 1994; Lusch & Brown, 1996). A growing number of research shows that firms have increasingly moved away from an adversarial relationship management style with their suppliers and have begun building long-term relationships with selected key suppliers (Kalwani & Narayandas, 1995; Narayandas & Rangan, 2004; Spekman, 1988; Ulaga & Eggert, 2006). For example, Chena, Paulraja, and Lado (2004) argued that strategic purchasing can engender sustainable competitive advantage by enabling firms to: (a) foster close working relationships with a limited number of suppliers; (b) promote open communication among supply-chain partners; and (c) develop long-term strategic relationship orientation to achieve mutual gains. In particular, it is suggested that price premium is a tool for firms to foster a stronger cooperative relationship with key suppliers (Kumar et al., 2003). For the perspective of emerging market suppliers, increasing their customers’ willingness to maintain a long term relationship with them will have a positive impact on the price premium they can receive from the customers, since these customers are less sensitive to the price of the product. Thus, we expect that,
Hypothesis 1: A customer’s expectation of relationship continuity with a specific supplier is positively associated with a customer’s willingness of accommodate the supplier with more favorable prices.
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3.2 Customer’s perceived threat of quality failure
We propose that a customer’s expectation of relationship continuity with a specific supplier is affected by its perception of threat of quality failure and its perceived value of the relationship with the supplier. We first discuss the threat of quality failure. As discussed above, the prior literature on price premium has suggested that a customer’s tendency to offer price premium is driven by their desire for quality (Rao & Bergen, 1992; Rao & Monroe, 1996). Threat of quality failure is greater when the customer is highly uncertain about the product/technology (Rao &
Monroe, 1996). This literature has focused on functional or technical quality delivered by a supplier. A more recent line of research begins to take a broader view of product quality by including all dimensions of a product, including product features, innovation, reliability, proven, consistency, performance as well as easiness to install and upgrade (Beverland, Napoli, &
Lindgreen, 2007; Mudambi, Doyle, & Wong, 1997: Kuhn, Alpert, & Pope, 2008; Van Riel, de Mortanges, & Streukens, 2005). In other words, the focus now shifts to the problems of customers that a supplier/product is solving, rather than the physical product as such (Vargo &
Lusch, 2004; Beverland et al., 2007; Ballantyne & Aitken, 2007). This view implicates that customers are not buying separate products or services, but total solutions in the form of bundles of products and services that solve their problems rather than provide benefits or features. Both customization and value-in-use are also at the core of this thinking.
A supplier’s investments in quality help foster a long term relationship with its customer (Anderson, Jain, &. Chintagunta, 1993; Cannon & Homburg, 2001). The supplier’s investments in research and development, quality control, and modern manufacturing practices improve its overall quality of products and services and help upgrading its ability that increases its competitiveness. Such investments therefore solicit greater customer loyalty and repeat purchase
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(Stalk & Hout, 1990). These investments nonetheless raise the operating costs of the supplier.
The customers are likely to accommodate the supplier by paying a price premium to the suppliers in order to consolidate a long relationship with the supplier. Thus, we expect that, Hypothesis 2: A customer’s perceived threat of quality failure is negatively associated with a customer’s expectation of relationship continuity
3.3 Customer’s perceived relationship value
A customer’s expectation of relationship continuity with a specific supplier can also be affected by its perceived value of the relationship with the supplier. The value of a business relationship is a multidimensional concept that reaches beyond the price versus quality trade-off that is prevalent in the traditional consumer research (Gassenheimer, Houston, & Davis, 1998).
In particular, recent research (Eggert & Ulaga, 2002; Lapierre, 2000; Möller & Törrönen, 2003, Ravald & Grönroos, 1996; Ulaga & Eggert, 2005; Walter et al., 2003) have investigated the multiple facets of relationship value, and generally conceptualized it in two major ways. The first focuses on the worth of a supplier’s bundle of physical products and services that offer to the customer (Anderson et al., 1993; Anderson & Narus, 1999; Newman, 1988). For example, Newman (1988) proposed that value received by a customer can be generally defined by the quality of the product offering divided by price. However, this approach is limited by the lack of empirical support for such a broad and mental accounting view.
The second focuses more explicitly on the long-term costs and benefits associated with a customer firm’s relationship with the supplier. Grounded in resource-based theory (Barney, 1991;
Conner, 1991; Hunt & Morgan, 1995), it views the relationship as a core asset of the firm whose value is best assessed holistically. Under this perspective, the value of a relationship can be
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viewed as the aggregate worth of all exchanges that will occur between two firms. That is, a customer-perceived value in business relationships is greater when s/he obtains greater long-term benefits than costs. The research that takes this approach (Ulaga & Eggert, 2006; Wilson, 1995) has suggested that the value of a relationship is the outcome of a collaborative relationship, which could enhance the competitive abilities of the partners. While the customer receive more competitive abilities from the relationship with the supplier, s/he is more likely to consolidate a long-term relationship with this supplier (Ulaga & Eggert, 2006). Thus, we expect that,
Hypothesis 3: A customer’s perceived relationship value is positively associated with a customer’s expectation of relationship continuity
3.4 Supplier’s brand investment
A supplier with a strong brand is likely to reduce a customer’s concern about quality failure.
The brand reputation is the aggregate perception of outsiders on the salient characteristics of companies, or brands (Fombrun & Rindova, 2000). A strong brand delivers a positive reputation to be successful and hence profitable (Herbig & Milewicz, 1995). The literature (Rao & Monroe, 1996) has suggested that the supplier with a brand name is less likely to cheat than a supplier without a brand name. Branded suppliers will offer their brand names as "hostages" in the marketplace, where they effectively serve as reassurance to customers that they are not a
"fly-by-night" operator. Moreover, suppliers with large investments in brand names are less likely to skimp on quality because of the perceived real costs of loss of future sales (and associated premiums), loss of sales in related markets, loss of goodwill, erosion of brand image, and the like. In other words, a branded supplier who cheats lose not only future sales and profits but also any prior investment in the brand name (e.g., advertising). Thus, a branded supplier firm
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is less likely to provide defective products. Therefore, we expect that the greater a customer's perception of a supplier's brand name strength among customers, the less a customer's perception of threat of quality failure.
From the customer's perspective, a supplier with large investments in brand names may have unique attributes and be hard to replace. A strong brand may generate positive externalities and add to the values of the cooperative relationship perceived by the customers (Ulaga, 2003;
Ulaga & Eggert, 2006), which in turn increases the supplier's power in its relationships with the customer (Frazier, 1983). Thus, the greater a customer's perception of a supplier's brand name strength among customers, the greater a customer's perception of benefits from the relationship with the supplier. Hence, we expect that,
Hypothesis 4a: A supplier’s brand investments are negatively associated with a customer’s perceived threat of quality failure
Hypothesis 4b: A supplier’s brand investments are positively associated with a customer’s perceived relationship value
3.5 Supplier’s capabilities
The literature (Choi & Hartley, 1996; Katsikeas, Paparoidamis, & Katsikea, 2004;
Kannan & Tan, 2002) has shown that suppliers play an important role in affecting a buyer’s competitive advantage. According to the resource-based view (RBV), competitive advantage arises from capabilities that are valuable and rare, owned and controlled by the firm, and difficult for competitors to copy or acquire (Amit & Schoemaker, 1993; Barney, 1991; Teece, Pisano, &
Shuen, 1997; Weigelt, 2013). Recent research (Dyer & Singh, 1998; Lavie, 2006; Denrell, Fang,
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& Winter, 2003; Santos & Eisenhardt, 2005) has begun to extend the inward-looking perspective of the RBV to the interfirm level, proposing that partner capabilities could be important in shaping a firm’s competitive advantage. More precisely, a supplier’s capabilities and value-generating mechanisms through interfirm learning or resource sharing could enhance its customer’s competitive advantage (Dutta & Weiss, 1997; Lane & Lubatkin, 1998; Steensma &
Corley, 2000).
In this paper, a supplier’s capabilities are defined as the supplier's potential that can be leveraged to the buyer's advantages in the long term (Sarkar & Mohapatra, 2006). The empirical study (Ulaga & Eggert, 2005) has demonstrated that there are three fundamental sources of value creation in a business relationship: product quality (value creation through the core offering), service support (value creation in the sourcing process), and know-how of a supplier (value creation in customer operations). Therefore, if a supplier consistently offers a standard quality component which operates more efficiently than its competitors, it may have a better supplier portfolio itself (Möller & Törrönen, 2003) and move into a main supplier position (Ulaga &
Eggert, 2006). Thus, we propose that a supplier’s upgrading in its manufacturing competences may decrease the customer’s uncertain about the supplier’s product/technology.
Indeed, holding a specific expertise helps a supplier solidify its position. In turn, a stronger position enables a supplier to accumulate more experience with a customer’s products and gain better insights into a customer’s operations than any other supplier. We also learned that key suppliers benefit from their preferred status because the interactions between key supplier status and know-how are mutually reinforcing (Ulaga & Eggert, 2006). Both the buyer and the supplier often have to make substantial adaptations and commitment of resources in the development of partnering relationships (Brennan & Turnbull, 1999; Ford & McDowell, 1999;
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Ritter, 1999; Spekman, Isabella, & MacAvoy, 2000). The efforts reflect the investment character of partnership establishment. A significant part of a supplier’s value is generally realized in the future and is thus dependent on the development of multiple partners (Möller & Törrönen, 2003).
Therefore, a supplier’s upgrading manufacturing competencies in areas such as product quality, service, and innovation know-how provide many opportunities to add value in a customer–supplier relationship. Consequently:
Hypothesis 5a: A supplier’s capabilities are negatively associated with a customer’s perceived threat of quality failure
Hypothesis 5b: A supplier’s capabilities are positively associated with a customer’s perceived relationship value
3.6 Supplier’s transaction-specific assets investments (TSIs)
A supplier's transaction-specific assets investments (TSIs) are the supplier's investments which are specialized to the exchange relationship that could be lost if s/he switches to another customer (Jap & Ganesan, 2000; Williamson, 1981). If the relationship ends, the other party will suffer economic losses; hence, such idiosyncratic investments are not vain promises. All of these economic safeguarding mechanisms ensure substantial negative consequences if the exchange relationship is terminated; thereby reducing the exchange partner’s incentive to behave opportunistically (Kang, et al, 2009). On the other hand, a buyer firm safeguards his specific assets by establishing control over aspects of the supplier’s operations. Thus, the supplier is less likely to skimp on quality because of its unilateral investments in production equipment, tools, and procedures. Consequently:
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Hypothesis 6a: A supplier’s transaction-specific assets investments (TSIs) are negatively associated with a customer’s perceived threat of quality failure
As mentioned above, when a supplier makes TSIs, the customer perceived such investments as a credible pledge of the supplier’s commitment to the relationship (Anderson & Weitz, 1992;
Williamson, 1985). This action can act as a signal that the supplier is willing to shoulder its portion of the risks (Ouchi, 1980). When a customer observed a supplier making TSIs investments, s/he becomes more confident of the supplier’s commitment, because it knows that the supplier will sustain economic consequences if the relationship terminated. By making specific investments, a supplier has an incentive to maintain and continue the relationship until the value of its investment is recouped (Williamson, 1985). There is a strong relationship between a supplier’s TSIs and a customer’s perception of the manufacturer’s commitment to it (Anderson & Weitz, 1992). Previous studies (Anderson & Narus, 1990; Anderson & Weitz, 1989, 1992) have concentrated mainly on the importance of transaction-specific investments in determining long-term orientation. The more dedicated assets that a supplier invests, the more likely that this supplier will accumulate partner specific knowledge (von Hippel, 1994) and thereby will develop interorganizational routines (Nelson & Winter, 1982). Such knowledge will then enable the supplier to outperform other potential suppliers in future transactions. Thus, these newly created capabilities can greatly improve exchange efficiency (Madhok, 2000) and enhance transaction value perceived by customers (Zajac & Olsen, 1993). Thus, we argue that a supplier’s transaction-specific assets investments (TSIs) will enhance the customer’s perception of relationship benefits. Consequently:
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Hypothesis 6b: A supplier’s transaction-specific assets investments (TSIs) are positively associated with a customer’s perceived relationship value
3.7 Supplier’s relational norms
Norms are expectations about behavior that are partially shared by a group of decision makers and directed toward collective or group goals (Gibbs, 1981; Macneil, 1980; Moch &
Seashore, 1981; Thibaut & Kelly, 1959). Following the line of research (Dwyer & Oh, 1988;
Heide & John, 1992; Jap & Ganesan, 2000), this study focuses on two mainly types of relational norms: solidarity and information exchange. The first relational norm is solidarity, which is a bilateral expectation that firms are directed toward relationship maintenance and a high value is placed on the joint relationship (Jap & Ganesan 2000; Macneil, 1980). Solidarity is a feeling of mutuality, a “we-ness” that assures the parties that arise in the course of the relationship will be treated as joint concerns. The second relational norm is information exchange, which is the expectation that the parties sill freely and actively provide useful information to each other (Heide & John, 1992; Jap & Ganesan, 2000). These norms address behavioral expectations in ongoing, present-day relationships.
Relational norms direct the focus of a supplier to bilaterally beneficial strategies and goals and a long-term orientation (Heide & John, 1992; Jap & Ganesan, 2000; Macneil, 1980).
Developing solidarity shifts the focus of a supplier from self-created behaviors to behaviors that foster unity arising from common responsibilities and interests. Previous research (Jap &
Ganesan, 2000) has proposed that the use of relational norms enhance a customer’s perception of the supplier’s commitment to the relationship. Consistent with past empirical results (Gundlach, Achrol, & Mentzer, 1995; Heide & John, 1992; Jap & Ganesan, 2000), we expect that a
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suppliers’ development of such norms will enhance the customer’s perceptions of relationship benefits. Thus, we expect that
Hypothesis 7: A suppliers’ development of relational norms is positively associated with a customer’s perceived relationship value
Figure 1 describes the determinants of a supplier’s willingness to provide a favorable price to its customer. H1 posits that customers’ expectation of relationship continuity (F2) with a particular supplier has a positive effect on their willingness to pay favorable price (F1). H2 and H3 contend that customers’ expectation of relationship continuity increase with decreased perceived threat of quality failure (F3), and with higher perceived values from relationship (F4).
The rest of the hypotheses suggest some factors that contributed to decreased threat of quality failure and perceived relationship values. They include suppliers’ own capability (brand investment (F5) and capabilities (F6)), and their consolidating the relationship with foreign customers (transaction-specific assets investments (F7), and relational norm (F8)).