Sustainability and the False Sense of Legitimacy: How Institutional Distance Augments Risk in Global Supply Chains

• Published date: 01 December 2016
• Date: 01 December 2016
• DOI: http://doi.org/10.1111/jbl.12143

Sustainability and the False Sense of Legitimacy: How Institutional

Distance Augments Risk in Global Supply Chains

Christian Busse

1

, Andrew P. Kach

1

, and Christoph Bode

2

1

Swiss Federal Institute of Technology Zurich

2

University of Mannheim

Supply chain scholars have begun to recognize the institutional influences on supply chains, yet scarce attention has been directed toward

the fact that global supply chains often comprise different institutions. This omission represents a severe shortcoming because the under-

standing of what constitutes legitimate behavior may vary substantially between contexts. This conceptual study employs the institutional dis-

tance concept to the case of supply chain sustainability risks. It focuses initially on paradoxical situations in which both the buyer and the

supplier fully comply with stakeholder expectations within their own legitimacy contexts, yet the buyer’s stakeholders still withdraw legitimacy

from and harm the buyer. The study analyzes the causal microfoundations of how and why such paradoxical risks manifest, drawing on stake-

holder theory and institutional theory. The analysis shows that accounting for the differing legitimacy contexts is necessary for explaining these

risks, thereby substantiating our initial claim that institutional distance matters to global supply chains. The study yields important implications

for corporate practice in that it highlights an inherent trade-off in many global supply chains.

Keywords: institutional distance; legitimacy context; stakeholder; supply chain risk; sustainability

INTRODUCTION

Not only internal efficiency considerations shape the behavior of

firms, but also external traditions, norms, and regulations stem-

ming from institutions in the firm’s environment (DiMaggio and

Powell 1983; Scott 2014). Only when firm behavior resonates

with the expectations from the institutional environment, is the

firm viewed as legitimate, because of which it can obtain and

maintain external support for its operations (Dowling and Pfeffer

1975; Suchman 1995). Institutional theory, which is concerned

with the influences of institutions on firm behavior, has hence

been widely adopted in the management domain. Increasingly,

applications of institutional theory are also emerging in supply

chain management (e.g., Tate et al. 2011; Cai and Yang 2014;

Saldanha et al. 2015). However, supply chain scholarship has

not yet directed any attention to the fact that global supply

chains often comprise different institutions at different supply

chain echelons. This conceptual study introduces the concept of

legitimacy contexts to capture the idea that the “socially con-

structed system of norms, values, beliefs, and definitions”(Such-

man 1995, 574) that determines what is legitimate firm behavior

depends upon the spatial (e.g., national) context. This research

employs the institutional distance concept (Kostova 1996; Kos-

tova and Zaheer 1999; Phillips et al. 2009) to assess the degree

of (dis-)similarity of two legitimacy contexts. The study demon-

strates how important institutional distance between a buyer’s

and a supplier’s legitimacy contexts can be, using supply chain

sustainability risks (SCSRs) as the more specific topic.

The notion of SCSR refers to the risk that stakeholders hold

the buying firm responsible for illegitimate conditions within its

supply chain, leading to reputational (Hofmann et al. 2014) and

often consequential financial loss (Hartmann and Moeller 2014;

Bregman et al. 2015). Since this loss-triggering mechanism dif-

fers from the more established disruption mechanism of sustain-

ability-unrelated supply chain risks, risk management approaches

are incomplete when they do not consider SCSRs (Hofmann

et al. 2014), meaning that they underestimate the overall risk

from the supply chain. The emerging SCSR topic is hence very

relevant for corporate practice.

Most SCSR research concentrates on noncompliance of the

supplier with shared traditions, norms, and regulations of its own

and the buyer’s legitimacy contexts (i.e., “misconduct”) as the

driver to SCSR (Foerstl et al. 2010; Hartmann and Moeller

2014). In contrast, this study focuses initially on paradoxical

manifestations of SCSR where the supplier complies (mostly)

with the institutional expectations in its own legitimacy context,

but the buyer is punished anyway. For example, on January 9,

2012, the discounter LIDL, Europe’s third largest retailer

(Deloitte 2014), was heavily scrutinized for allegedly engaging

in unethical practices by a documentary broadcasted on German

public television (Laghai and Kordes 2012). The documentary

was geared toward the manufacturing operations of LIDL’s sup-

pliers in Bangladesh where garment factory workers were discov-

ered to be operating under conditions considered highly

unacceptable from a Western perspective (Alam et al. 2008;

Venkatesan 2013). The broadcast initially reached 6.3 million

viewers (Krei 2012) and tarnished LIDL’s reputation substan-

tially, as the analysis of a sample of viewers indicated to us. We

refer to such SCSR manifestations with the attribute “paradoxi-

cal”to highlight how research has yet to explain them.

The context dependency of stakeholders’bases of evaluation

has been addressed in research related to the strategic manage-

ment of multinational enterprises (e.g., Husted and Allen 2006;

Scherer et al. 2013; Surroca et al. 2013), but not within the field

of supply chain management. This omission represents a severe

shortcoming because many supply chains have become increas-

ingly globalized over the last decades (Ellram et al. 2008; Mol-

lenkopf et al. 2010), such that they now cross different

Corresponding author:

Christian Busse, Department of Management, Technology, and Eco-

nomics, Swiss Federal Institute of Technology Zurich, Wein-

bergstrasse 56/58, 8092 Zurich, Switzerland; E-mail: cbusse@ethz.ch

Journal of Business Logistics, 2016, 37(4): 312–328 doi: 10.1111/jbl.12143

© Council of Supply Chain Management Professionals

cognitive, normative, and regulative contexts, thereby giving rise

to challenges in meeting varying stakeholder expectations.

Against this background, the objective of the paper is to unpack

the conceptual microfoundations of how institutional distance in

terms of cultural traditions, normative values, and regulative

standards augments SCSR. Specifically, the study shows that

paradoxical manifestations of SCSRs in which the supplier

behaves legitimately within its own context, yet the buyer is pun-

ished by its stakeholders, can only be explained by dedicating

due attention to the difference between the legitimacy contexts of

buyer and supplier. The study answers the intertwined research

questions: “How exactly do paradoxical manifestations of SCSRs

occur?”“and Which role does institutional distance play in aug-

menting SCSRs?”Moreover, the study contributes to contextual-

izing the legitimacy concept, which is a critical theme in both

institutional theory and stakeholder theory. Assuming that a glo-

bal buyer–supplier relationship is established for a certain cate-

gory, the inquiry is focused on systematic differences of

legitimacy contexts at a macroscopic (i.e., country) level. We

adopt an integrated perspective of stakeholder theory and institu-

tional theory. Both theoretical lenses are frequently employed in

sustainable supply chain management research, sometimes also

jointly (Simpson and Sroufe 2014; Touboulic and Walker 2015).

The following section provides a literature review of SCSRs.

The two sections thereafter analyze SCSRs through the lenses

of stakeholder theory and institutional theory. Next, we explain

the paradoxical risk manifestations by deriving a process model

of their occurrence. Subsequently, we analyze how institutional

distance augments SCSR. The following section illustrates our

theoretical explanation by means of explaining the aforemen-

tioned LIDL case. The concluding discussion sketches the

research, managerial, and social implications of the paper, con-

siders limitations of the analysis, and suggests paths for future

research.

LITERATURE REVIEW ON SCSRS

SCSRs lie at the intersection of sustainable supply chain man-

agement research and research on global supply chain risks.

Excellent reviews exist for both streams of literature (e.g., Rao

and Goldsby 2009; Winter and Knemeyer 2013). Instead of

repeating their findings, this section focuses on the specific

nature of SCSRs and on juxtaposing SCSRs that are appar-

ently triggered by supplier misconduct with more paradoxical

SCSRs.

The specific nature of SCSRs

When firms decide to outsource portions of their manufacturing

and service operations, to source in low-cost countries, to reduce

slack in their supply chains, or to collaborate more intensively

with their supply chain partners, they become more vulnerable to

risks within their supply chains (Zsidisin et al. 2005; Blackhurst

et al. 2011). These risks have gained significant attention during

the last decade and “supply chain risk management”has evolved

into one of the most active fields within supply chain manage-

ment research (Narasimhan and Talluri 2009; Sodhi et al. 2012).

Much of this research has focused on disruption risks in the

upstream supply chain such as delivery failures, quality glitches,

or supplier financial defaults (Blackhurst et al. 2005; Macdonald

and Corsi 2013). The common feature of these risks is that they

materialize through a disruption somewhere in the supply chain

(triggered by, e.g., natural disasters, labor strikes, operational

problems, or cargo losses) that subsequently obstructs the inter-

connected flow of materials, funds, or information among supply

chain entities (Bode et al. 2011).

However, ample evidence suggests that firms can also experi-

ence serious losses from social, ecological, or ethical problems

that exist in their supply chains when no disruptions occur. Even

firms that supposedly have command of excellent supply chain

management processes may encounter substantial problems stem-

ming from SCSR. Apple Inc., for example, although renowned

for its ability to orchestrate its supply chains, received a plethora

of bad publicity due to negative working conditions discovered

at its supplier Foxconn (Liu et al. 2010). This example highlights

how traditional risk management approaches, aimed at the pre-

vention of disruptions and the mitigation of their harmful effects,

are incomplete when they do not consider SCSRs. In essence,

these risks also originate from supply chains, but materialize

through a stakeholder reaction mechanism whenever stakehold-

ers hold firms responsible for illegitimate conditions within sup-

ply chains, leading to reputational loss (Hofmann et al. 2014). A

tarnished reputation of the buying firm can, in turn, result in

financial loss, for example, because of changing purchase inten-

tions of consumers and actual boycotts (Hartmann and Moeller

2014; Bregman et al. 2015). Therefore, SCSRs have recently

also attracted substantial research attention. The related research

has been concerned with stakeholders’evaluation and punish-

ment behavior (Hartmann and Moeller 2014; Hofmann et al.

2014; Bregman et al. 2015), trade-offs surrounding these risks

(Busse 2016), the difficulty of tending to stakeholders’varying

expectations and needs (Foerstl et al. 2010; Gualandris et al.

2015), and the contextual appropriateness of risk management

strategies (Hajmohammad and Vachon 2016). This study comple-

ments the valuable prior research by considering systematic

country-level influences on the stakeholders’assessment

standards.

Paradoxical SCSRs

Research on SCSRs emphasizes the importance of misconduct

and unsustainable supplier behavior as a driver of these risks

(e.g., Foerstl et al. 2010; Hartmann and Moeller 2014). This

study specifies misconduct as a case of noncompliance of the

supplier with seemingly objective traditions, norms, and regula-

tions which are established for both supplier and buyer. Indeed,

supplier misconduct is apparent in many publicly known SCSR

cases. In 2013, for example, European consumers punished gro-

cery retailers severely by withdrawing from meat products in

response to the illegal horsemeat component found in some beef

products (Yamoah and Yawson 2014). Likewise, brands such as

Benetton, The Children’s Place, and El Corte Ingles received

harsh criticism from their stakeholders in the aftermath of the

Rana Plaza building collapse, which led to more than 1,100

casualties because the supplier factory had illegally been erected

four floors taller than allowed (Manik and Yardley 2013; Clean

Clothes Campaign 2014).

Sustainability and the False Sense of Legitimacy 313