Financial benefits and risks of dependency in triadic supply chain relationships

• Author: Yoon Hee Kim,Darren Henderson
• DOI: http://doi.org/10.1016/j.jom.2015.04.001
• Published date: 01 May 2015
• Date: 01 May 2015

Journal of Operations Management 36 (2015) 115–129

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

Financial benefits and risks of dependency in triadic supply chain

relationships

Yoon Hee Kima,∗, Darren Henderson b,1

aCollege of Business Administration, Georgia Southern University, PO Box 8036, Statesboro, GA 30460 United States

bIvey School of Business, Western University, 1255 Western Road, London, ON N6G0N1 Canada

article info

Article history:

Received 28 January 2014

Received in revised form 22 March 2015

Accepted 5 April 2015

Available online 17 April 2015

Accepted by Thomas Younghoon Choi

Keywords:

Relationship embeddedness

Resource dependency

Financial performance

Triadic supply chain relationships

Econometric analysis

abstract

The economic consequences of interdependent relationships with suppliers and customers have long

been of interest to supply chain managers and academics alike. Whereas previous studies have focused

on the benefits or risks of embedded relationships that accrue to buying firms, this study simultaneously

investigates the effects of a supplier’s and a customer’s embeddedness, arising from resource dependency,

on a focal firm’s financial performance in triadic supply chain relationships. Using 1,144 unique focal

firm-years for U.S. firms from Compustat, we find that a supplier’s and a customer’s dependency both

increase the focal firm’s performance in terms of return on assets (ROA) and return on sales (ROS) by

increasing asset turnover (ATO). As levels of supplier and customer dependency on the focal firm increase,

however, the economic benefits of customer dependency diminish beyond a certain point, while those of

supplierdependency continue to increase above that threshold. Thus, our findings show the paradoxically

differing risks of the supplier’s versus the customer’s dependency, while establishing the unequivocal

economic benefits of supplier and customer relations for focal firms in the middle of concentrated triadic

relationships.

© 2015 Elsevier B.V. All rights reserved.

1. Introduction

The economic ramifications of a firm’s interdependent rela-

tionships with suppliers and/or customers have been the popular

subject of scholarly attention in various disciplines and are still

being hotly debated. From the perspective of creating value, some

researchers argue that firms can jointly create greater market value

(i.e., a larger profit “pie”) by pooling resources and cooperating with

exchange partners than by operating alone (Cao and Zhang, 2011;

Jap, 1999; Lavie, 2006; Patatoukas, 2012). Yet from the perspective

of capturing value, other researchers have raised the concern that

relationships with major customers and/or suppliers can impede a

firm’s profitability because the sharing of value (i.e., division of the

profit pie) among supply chain members often depends on their

respective bargaining powers (Galbraith and Stiles, 1983; Gosman

and Kohlbeck, 2009; Lanier et al., 2010; Porter, 1980).

These diverging perspectives toward the economics of inter-

dependent relationships are derived largely from their differing

∗Corresponding author. Tel.: +1 912 478 0523; fax: +1 912 478 1835.

E-mail addresses: ykim@georgiasouthern.edu (Y.H. Kim), dhenderson@ivey.ca

(D. Henderson).

1Tel.: +1 519 661 3220; fax: +1 519 661 3485.

views about a relationship’s nature. The former school of thought

often characterizes the nature of interfirm relationships within

the context of embeddedness, whereby firms embedded in a net-

work of interdependent ties tend to cooperate for mutual benefits

(Granovetter, 1985; Uzzi, 1996, 1997). In contrast, the latter school

of thought assumes interfirm relationships to be competitive in

nature where the principle of power governs economic behavior

of self-interested parties (Galbraith and Stiles, 1983; Porter, 1980).

In this regard, Porter (1980) argues that the profitability of firms

with concentrated relationships in supply and distribution markets

would be eroded by suppliers as well as customers.

Over decades, however, firms have moved toward highly inter-

dependent relationships with fewer exchange partners in both

upstream and downstream markets through such practices as sup-

ply base reduction and strategic partnerships (Choi and Krause,

2006; The Economist, 2006; Patatoukas, 2012). Under these cir-

cumstances, the following research questions arise: Why would

firms seek to increase interdependency with fewer suppliers and

customers despite potential power disadvantages? What benefits

accrue to focal firms in the middle of concentrated triadic relation-

ships?

Our study aims to investigate these research questions through

the theoretical lens of embeddedness, a concept that refers broadly

to the contingent nature of economic behavior with respect to

http://dx.doi.org/10.1016/j.jom.2015.04.001

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