Creating Value in Supply Chains
Creating Value in Supply Chains: Suppliers’s Impact on Value for Customers, Society and Shareholders
Mirjam Kibbeling, PhD (2010)
This dissertation deals with the question how suppliers contribute to creating value in supply chains. The last decades have been characterized by increased specialization of business activities. Consequently, firms have outsourced between 50% and 80% of their business activities to suppliers. For this reason, purchasing and supply management receives growing interest, both from managers and academics. Traditionally, the focus of purchasing and supply management is on achieving superior cost reductions in dealing with suppliers. Today, companies acknowledge suppliers increasingly as a source of competitive advantage. Suppliers not only determine the company’s cost position, they also are crucial for its innovation processes , reduction of carbon footprint in the supply chain and achieving customer satisfaction. Suppliers thus have become important facilitators of value creation processes that firms have to rely on in order to compete in a global market.
Despite the value potential of suppliers, the understanding of how suppliers contribute to the value creation processes of a firm is still little understood. A first problem is how to define the concept of value. In our thesis we have explained that the value concept can be differentiated into three sub concepts i.e. shareholder value, customer value and societal value. Firms need to respond to ever changing customer demands. Doing so effectively requires a strong market orientation. Also, firms have to compete for the acquisition of scarce (natural) resources, and are expected to operate in a sustainable i.e. socially responsible manner. Therefore firms need to integrate Corporate Social Responsibility principles in their business processes. Next, shareholders and investors want to see satisfactory financial returns.
Business practitioners thus face an intriguing challenge how to cope with the complexity and dynamics of satisfying different stakeholder requirements and expectations in parallel. Today, firms cannot do this individually . They need to do this in close collaboration with the partners that make up their supply-chain. Therefore a major research question underlying the thesis was: how do firms manage their internal and external resources to satisfy different stakeholders and stakeholders expectations?
In this dissertation we investigate how firms create value with their suppliers, using insights from the stakeholder theory, the resource-based view and the resource dependence theory. Based upon stakeholder theory we identify three important stakeholder groups: customers, society and shareholders. Next, we use the resource management theory, a recent offspring of the resource-based theory of the firm, to describe the mechanisms through which a firm is able to satisfy these stakeholders. The central research question of this dissertation is: What is the impact of suppliers on the ability of a focal firm to satisfy its customers, society and shareholders?
We investigate this research question in three studies, each representing a different stakeholder perspective, theoretical focus and research objective. In the first study we examine how firms try to create value for customers and realize customer satisfaction through market orientation and innovativeness. The second study examines the effects of Corporate Social Responsibility (CSR) and innovativeness on a company’s CSR reputation and customer satisfaction. The third study addresses the shareholder perspective by looking at the interaction effects between market orientation, CSR orientation and supplier orientation in relation to current and expected financial firm performance.
The research objective and research question called for a unique research design that examines multiple parties operating in a supply chain. By means of a quantitative survey, data were collected from three members along a coherent supply chain: a supplier, a focal firm and a customer. In total, 88 sets consisting of three matched supply chain partners in business-to-business relationships have been used for this research. The results contribute to the understanding of value creation in supply chains. The results address the role of suppliers in delivering customer value, societal value and firm performance.
Creating Customer Value through Market Orientation and Innovativeness
The objective of the first study was to understand how suppliers enable a focal firm to realize customer satisfaction by means of market orientation and innovativeness. We have introduced the concept of a supplier’s end-user orientation to describe the supplier’s processes and activities directed at creating and satisfying the customer of the focal firm (in this study referred to as the end-user) through continuous needs assessment. By doing so, the first study aimed to understand whether a supplier’s end-user orientation and a supplier’s innovativeness increase customer satisfaction, either directly or indirectly. The corresponding research question was: What is the impact of a supplier on the ability of a focal firm to achieve customer satisfaction through market orientation and innovativeness?
Based upon our research results, the direct effects of market orientation on customer satisfaction seem rather limited. Within the focal firm, market orientation clearly is a driver of innovativeness. Also, at the level of the supplier we found positive effects of market orientation on the supplier’s innovative capabilities. Our results show that the focal firm’s market orientation and the suppliers end-user orientation barely correlate. Neither did we find a relationship between a supplier’s end-user orientation and a supplier’s innovativeness. However, supplier innovativeness positively contributes to the focal firm’s innovativeness. And the focal firm’s innovativeness positively contributes to customer satisfaction. Hence, it can be concluded that a suppliers innovativeness impacts the final customer’s satisfaction indirectly i.e. through its impact on the focal firms innovation capabilities.
in conclusion, it seems that market orientation is primarily an enabler of innovativeness at the individual firm level, rather than at the level of the supply chain. Market orientation affects innovation practices within the boundaries of the individual firm, but does not particularly drive supply chain collaboration. Next, supplier innovativeness acts as a driver of a focal firm’s innovative response to its customers. The first study thereby stresses the strategic relevance of developing relationships with innovative suppliers, especially when the focal firm seeks opportunities to strengthen its innovative capabilities.
Creating Societal Value: Corporate Social Responsibility a Key Driver of Innovativeness
The second study of this dissertation examined how firms realize societal value through Corporate Social Responsibility (CSR) and innovativeness , More particularly, the study was aimed at assessing whether, and to what extent, CSR drives innovation , both at the individual company level and at the supply chain level. The positive effects of CSR on the firm’s innovation processes had been suggested by other researchers, but was not empirically tested yet. We expected that the supplier’s CSR orientation and innovativeness would affect both customer satisfaction and the firm’s CSR reputation at the customer. The research question if the second study therefore was: What is the impact of a supplier on the ability of a focal firm to act socially responsible and foster its CSR reputation and customer satisfaction?
The results suggest that CSR orientation and innovativeness are strongly related, both within the focal firm and the supplier firm. Adopting a CSR orientation raises the focal firm’s CSR reputation, which – supported by the firm’s innovativeness – accounts for increased customer satisfaction. Also in this study we found that a supplier’s innovative capabilities foster the focal firm’s innovative capabilities. However, we did not find any direct effects between supplier’s CSR orientation and the focal firm’s CSR orientation. During our analysis, we found a negative relationship between a supplier’s CSR orientation and a focal firm’s innovativeness. Although this relationship warrants more research, it seems that just pursuing CSR requirements by a focal firm in the relationship with its suppliers, may be detrimental if the focal firm does not pursue a formal innovation strategy. In such cases driving CSR in supply chain relationships may have a negative outcome of the firm’s overall performance. With respect to the research question underlying the second study, we may conclude that adopting a CSR orientation, both internally and externally, may work out positively on the firm’s innovativeness. CSR orientation impacts the focal firm’s CSR reputation in a direct way.
Firm Performance: Managing for Multiple Stakeholders
The third study of this dissertation combined insights from the first two studies to examine market orientation, CSR orientation and supplier orientation in relation to a firm’s current and expected financial performance. The concept of a focal firm’s supplier orientation was introduced to describe the focal firm’s activities directed at developing and operating an excellent supply base. Based upon stakeholder theory, we examined the interaction effects of market orientation, CSR orientation, and supplier orientation on innovativeness and financial performance. The research question in study three was: What is the impact of multiple orientations at a focal firm and its suppliers on the ability of a focal firm to achieve current and expected firm performance?
The results of the third study showed that external orientations mediate – instead of interact – at the level of the individual firm. That is, they affect each other instead of influencing the impact on innovativeness or performance. We found (again) that the external orientations affect the individual firm, while innovativeness connects supply chain partners. The answer to the third research question is that two variables influence superior firm performance: a focal firm’s supplier orientation impacts current performance, and a focal firm’s innovativeness affects expected future performance. Supplier’s innovativeness fosters focal firm’s innovativeness and indirectly affects expected future performance. It thus seems that a firm’s collaboration with suppliers will support the firm to achieve financial returns today, as well as achieving good financial results for the future.
Based upon the outcomes of the three studies, we can answer the overall research question of this dissertation: What is the impact of suppliers on the ability of a focal firm to satisfy its customers, society and shareholders? On the one hand, we found no evidence for a direct impact of suppliers on the value created for the different stakeholders targeted. On the other hand, we found positive evidence for a supplier’s impact on the focal firm’s ability to respond to different stakeholders. Three observations are essential for reflecting on the overall research question.
Firstly, we found in each of the studies that supplier’s innovativeness is a key driver of focal firm’s innovativeness. Through innovativeness, the focal firm is able to serve customers better and realize superior financial performance. The supplier’s innovativeness increases the focal firm’s ability to deliver value to customers, society and shareholder. Because the effects of the supplier are input for the focal firm, the results assign a crucial role to the focal firm to enable, facilitate and leverage supplier’s innovativeness.
Secondly, we have found that the focal firm’s supplier orientation, affects the firm’s current financial performance. A supplier orientation thus seems to create a supply base with buyer-supplier interfaces that enable the firm to develop more adequate firm’s processesMIRJAMMiriam, please, write down what you intend to state here. Be more clear and explicit. .
Thirdly, our findings suggest where we should not search for added value in supply chain relationships. The results indicate no relationship between a focal firm’s market orientation and a supplier’s end-user orientation; neither do we see that CSR-oriented firms relate to CSR-oriented suppliers. In contrast to the concept of strategic fit suggested by other researchers, market orientation, CSR orientation and supplier orientation seem primarily mechanisms, that are relevant for within the firm relationships problem than across firm relationships. We may conclude that a combination of external orientations and supplier’s innovativeness allow a firm to realize value for customers, society and shareholders.
Contribution to academic research
The dissertation contributes to academic research in several ways. The first theoretical contribution stems from the use of three complementary theoretical perspectives: the resource dependence theory, the resource management view and the stakeholder theory. Especially the resource management view has proved valuable to explaining how firms create value for customers, society and shareholders, with support of suppliers. The research results provide an extension of the resource management view with two additional considerations. The first extension is the further specification of the external orientations that guide internal resource management practices. Firms benefit from adopting multiple external orientations, such as market orientation, CSR orientation and supplier orientation. These external orientations foster different qualities of the firm and thereby jointly increase overall firm performance. The second extension of the resource management view is the observation that while individual external orientations are an internal driver of innovativeness, our results have demonstrated an another driver of innovativeness, i.e. supplier’s innovativeness.
The second contribution to academic research relates to the pivotal role of innovativeness in our research results. The results build a strong case for the concept of open innovation. The central idea behind open innovation is that knowledge has become so widely distributed that companies cannot afford to rely entirely on their own resources for their innovation strategies. The results demonstrate that innovation seems internally guided by market orientation and Corporate Social Responsibility. Externally, supplier’s innovativeness emphasizes the role of suppliers in the concept of open innovation.
The third contribution is to the field of purchasing and supply management. The results have shown that suppliers do not directly affect customer satisfaction. Suppliers, though, prove to be valuable to the innovation processes of the focal firm. Similarly, a supplier orientation has shown a valuable concept for boosting a firm’s current performance. Jointly these research result show that a value-orientation in purchasing and supply management contributes to realizing current and future firm performance.
Implications for practitioners
For business practitioners our findings emphasize the importance of innovativeness in satisfying customers and in achieving superior performance. A firm’s innovativeness is driven by two sources: internal as well as external sources. Internally, innovativeness is triggered by a firm’s external orientations such as market orientation and CSR orientation. Externally, a firm’s innovative capability is affected by the innovative capability of the suppliers the firm lines up with. We briefly explain the internal and external sources for innovation.
Our results have shown that combining different stakeholder perspectives and requirements in business activities positively contributes to overall firm performance. Although market orientation has become fashionable among practitioners, supplier orientation and CSR orientation are not yet common practice. Based on the outcomes of this dissertation, we recommend investing in CSR as a driver of innovation. Also in supplier relationship management, the combination of CSR and innovation is essential to increase the competitiveness of the firm. Similarly, a supplier orientation affects the firm’s overall competitiveness. The results of dissertation suggest it is worth pursuing all these different stakeholder orientations at the same time.
If firms want to actively pursue an innovative strategy, it is vital to initiate relationships with suppliers that have superior innovative capability. Establishing relationships with innovative suppliers may require a different attitude with regards to supplier selection and supplier relationship management. Firms seem better off establishing a sophisticated supplier evaluation and a selection processes that are not primarily driven by achieving lowest transaction costs. Rather, firms should prefer to cooperate with suppliers that are innovative and that are willing to share skills, abilities, and provide for financial support in order to create value for the focal firm. Next, after contracts have been put in place, practitioners need to continue their efforts to enable suppliers to share their best and most up-to-date knowledge with the focal firm. A contract will not assure the supplier’s best efforts. Not only purchasing and supply management, but all disciplines that potentially benefit from supplier knowledge, have to invest in the buyer-supplier relationship. As our research has demonstrated, new ideas from suppliers are an important external trigger for developing more innovative customer solutions, environmentally friendly business processes and, hence, a solid basis for future firm performance.