Adding value to buyer-supplier relationships in China.

Author:Sternquist, Brenda


What a difference competition makes. For almost 40 years, the Chinese government has gradually introduced market incentives and increased access to differentiated goods and services. Wang and Zhang (2005) describe the profound changes in Shanghai's retail economy as a result of deregulation and liberal government policies, encouraging the entry of international retailers with more sophisticated retail management systems. As state control receded, private market infrastructure has developed, including various sources of information about supply markets and new sources of domestic and foreign suppliers. During this transition, retailer buyers relied upon guanxi as the most efficient and credible means to gain access to hard to obtain resources and information and to reduce the likelihood of supplier opportunism (Yang 1994). Accordingly, many of the trade and scholarly works in the last decade have emphasized the importance of guanxi ties for successful business performance (e.g., Ambler, Styles and Xiucun 1999; Peng and Luo 2000).

The present research adds to the understanding of how supplier selection strategies may have evolved. Based upon our personal interviews with Chinese businesses and theoretical support, we argue that the need for guanxi has declined over time. This supports Lihong and Goffin's (2001) study of international joint ventures in China. The key reasons for this change are market efficiency improvements motivated by a need to compete with foreign suppliers and a growing sophistication of Chinese consumers (Taylor 2003). Competitive supply markets shift the basis of supplier evaluation from social criteria (i.e., guanxi) to more economic criteria (i.e., ability to add value). As markets become more competitive and transparent, the need for partners with special or additional access to controlled resources should recede.

In summary, we seek to make several contributions to the literature. In terms of theory, we empirically test competing hypotheses about retail buyer-supplier relationships in China. If guanxi is necessary to procure the appropriate mix of goods and services, retailers should expect reasonably effective capabilities from their guanxi suppliers. However, if retail procurement has transitioned sufficiently from the planned economy to competitive markets, we should see no relationship between guanxi relationship and supplier credibility. Instead, we should see a strong positive relationship between a supplier's provision of value-added products and services and a retailer's perception of their credibility. In addition, channels research has typically taken a manufacturer perspective. However, Cannon and Perreault (1999) suggested that distributors also play a crucial role and the buyer's view is more likely to be the determinant of the type of channel relationships formed. As pinpointed by Frazier (1999), what is missing is research that examines channel interactions from the distributor's point of view. Accordingly, our research examines the retail buyer's perspective of its relationship with its suppliers. In terms of methodology, we offer empirical evidence to advance channel literature in the Chinese context. In addition, we use a structural equation modeling technique (i.e., PLS) that is particularly useful with smaller datasets. Finally, we offer some managerial insights about supplier selection in the rapidly evolving Chinese retail industry.

The paper is organized in following manner. First, a literature review will develop the conceptual framework and hypotheses. Second, the model will be tested. Finally, we will discuss our findings and their implications about business in China.


A central theme of relationalism is how to nurture lasting inter-organizational relationships with a structure that creates mutual benefits for the parties involved (Achrol 1997). Buyers select one supplier over its competitors due to certain beliefs and expectations about how the supplier will facilitate its business objectives. Over time, buyers and suppliers become dependent upon each other to achieve their objectives. Consequently, strong buyer-supplier relationships can enable channel partners to perform more efficiently in the face of turbulent regulatory markets and other environmental uncertainties (Noordewier, John, and Nevin 1990; Heide and Weiss 1995). This paper examines Chinese retail buyer perceptions of the key drivers in their dependence upon suppliers in meeting their business needs.

Market orientation (MO) has been conceptualized from behavioral and cultural perspectives (Griffiths and Grover 1998; Homburg and Pflesser 2000). Some researchers regard the activities related to data collection, knowledge generation procedures, and learning as a reflection of MO. Kohli and Jaworski (1990) define market orientation as "the organization-wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and the organization-wide responsiveness to it." (p.6). In effect, MO is a behavior characterized by the systems and routines established to capture, share and leverage information and knowledge. In contrast, some researchers contend that organizational culture is reflected in the firm's market-oriented behaviors (Narver and Slater 1990; Homburg and Pflesser 2000). Narver and Slater (1990) demonstrate that market orientation has three dimensions--customer-orientation, competitor-orientation and inter-functional coordination--and is strongly related to market performance. Hurley and Hult (1998) link organizational learning and development to a firm's capacity to innovate. In summary, MO firms engage in activities to acquire the necessary information to foster organizational learning and growth through innovation.

Suppliers seek out opportunities to offer buyers superior value than their competitors in terms of long-term revenue generation and cost reduction (Narver and Slater 1990). Value is created by understanding the marketing environment in order to identify their buyers' expressed and unexpressed needs (Narver, Slater and McLachlan 2000). By identifying these needs and acting upon them, suppliers are able to exceed their channel partners' expectations.

Though market orientation has largely been tested only in a developed economy context, there is a growing body of literature testing market orientation in less developed economies (e.g., Hooley, Cos, Fahy, Shipley, Beracs, Fonfar and Snoj 2000; Subramanian and Gopalakrishna 2001; Tse, Sin, Yau, Lee and Chow, 2003). In the Chinese context, Liu and Roos (2006) argue that only industries with intense domestic and foreign competition, such as retailing, are likely to contain market-driven firms. At the same time, in 2002, the four-firm market concentration in Chinese retailing is very low at less than 1.5%, meaning that Chinese consumers have an extraordinary amount of choice between retailers (Euromonitor, 2004). As a result, supplier market orientation in differentiating retail offerings is even more critical.

Supplier Value Added is the degree to which a supplier contributes to its partner's product and service offerings through the performance of channel functions (Celly and Frazier 1996; Corey, Cespedes and Rangan 1989). With a clear understanding of the environmental forces driving and shaping its customers, the supplier is in a position to identify and develop activities and products to support its customer (Deshpande and Farley 1998; Simpson, Siguaw and Baker 2001). Cannon and Perreault (1999) discuss the adaptations made by suppliers to better serve buyers, such as adjustments in their product delivery schedules to reduce the probability of unintended stockouts. Buyers also select suppliers based upon key criteria, including the competitiveness of supplier prices, product quality, and delivery performance (Doney and Cannon 1997). By delivering superior value relative to their competitors, suppliers increase the likelihood of satisfying the buyer's needs. Therefore, we would hypothesize that:

H1: Suppplier market orientation is positively associated with supplier value-added.

Trust can serve as an efficient governance mechanism in exchange relationships (Bradach and Eccles, 1989). Trust can be conceptualized as a higher order construct of benevolence and credibility (Ganesan 1994; Luhmann 1979). While benevolence relates to behaviors and intentions, credibility relates to the partner's perceived capability to achieve stated business objectives. In this study, we focus on the latter dimension. Credibility is defined as "the extent to which the retailer believes that the vendor has the required expertise to perform the job effectively and reliably" (Ganesan 1994, p. 3). As Chinese retailers struggle to modernize and to compete with highly efficient foreign retailers, supplier credibility is most critical for continued existence (Kalish 2002). Genuine competence and reliability cannot be feigned. While institutional trust incorporates expectations of forbearance, in transitional markets, short-term survival relies on having the resources and partners to function efficiently today.

In the selection of suppliers, buyers form expectations about the intrinsic and extrinsic rewards that result from the partnership (Bagozzi, 1975). To the extent that suppliers provide products and/or services that are of strategic value to the buyer a resource dependency situation is created (Pfeffer and Salancki 1978; Skinner and Gultinan 1985). Buyer perceptions of the supplier's credibility are positively affected when a buyer perceives a greater value in the exchange (Frazier 1983). A supplier that is willing to make investments in order to customize its product and service offerings further engenders trust from buyers (Anderson and Narus 1990). As supplier contributes to the buyer's bottom line, buyer perceptions about the...

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