The Effects of Relational Channel Exchange on the Small Firm: A Conceptual Framework

Abstract

Recently, much has been written about the changing nature of buyer-sup-plier channel relationships. As a means of reducing costs, improving quality, and increasing efficiency, many firms are moving away from traditional arms-length relationships with their suppliers and are forging closer, more collaborative ties with a smaller number of channel partners (Dwyer, Schurr, and Oh 1987; Anderson and Narus 1990; Helper 1991). For example, in recent years Xerox, Motorola, General Electric, and others have reduced their supplier base by 33 percent to 50 percent (Speckman 1988). In many instances, the goal has been to restructure channel relationships on a collaborative (rather than on an adversarial) basis in which both parties share burdens and benefits (Varadarajan and Rajaratnam 1986; Heide and John 1990). There are several reasons for this trend. First, from a broad perspective, it may be a competitive necessity in many industries. The cost advantage that Japanese automakers enjoy over many of their foreign rivals, for example, is often attributed to efficiencies in supplier relations (Helper 1991). Second, there are potential advantages to what has become known as opposed to traditional forms of channel (see, for example, Dwyer, Shurr, and Oh 1987). The term governance is used in channels research to refer to the norms that direct, control, and regulate channel relationships (Macneil 1980). A relational exchange is governed by norms of long-term cooperation, mutual trust, and open communication rather than by short-term norms of self-interest (Provan and Gassenheimer 1994; Robicheaux and Coleman 1994). Among other benefits, this form of exchange may offer buyers reduced costs, access to the proprietary technology of their suppliers, and improved control (Porter 1985; Gales and Blackburn 1990; Sriram, Krapfel, and Speckman 1992). Suppliers may benefit by being assured of a stable portion of their buyers' business and by being privy to their buyers' future plans, which helps them achieve production stability and creates efficiencies in administration, marketing, and research and development (Han, Wilson, and Dant 1993; Lyons, Krachenberg, and Henke 1990). Finally, as large firms try to reduce their spending, they are increasingly outsourcing a variety of their routine activities to more specialized smaller firms. Managing these relationships through relational contracting provides larger firms the dual advantage of cost savings and long-term partner cooperation. Yet, despite the promise of this new trend in buyer-seller relations, there are caveats, particularly for small firms. As buyers and suppliers form closer ties, the potential costs of disengaging from these relationships increase. In addition, firms may feel a heightened sense of vulnerability as their total number of channel partners shrinks (Speckman 1988). This may occur because as a firm's number of channel partners is reduced, its dependence upon each remaining relationship increases. Finally, initially well-designed channel relationships may deteriorate over time (Levitt 1983). These relationships may persist, however, because the parties involved feel locked-in by the presence of asset-specific investments that have little or no salvage value outside a particular relationship. While it is tempting to focus solely on the benefits of the changing nature of buyer-seller channel relationships, the trend towards relational exchange clearly involves trade-offs. This is particularly evident in the small business sector (Gales and Blackburn 1990; Lyons and Bailey 1993). For instance, on the one hand, relational exchanges may help resource-strapped small firms lock in customers and reduce costs (McKee 1992; Han, Wilson, and Dant 1993). This may provide the firms that participate in relational exchanges a competitive advantage over industry rivals that do not. On the other hand, relational exchanges require a high degree of managerial input, and as a result limit the number of channel relationships that a firm can maintain. …

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