BUYER-SUPPLIER RELATIONSHIPS IN THE SOUTH AMERICAN AUTOMOTIVE INDUSTRY Svetla Trifonova Marinova University of Birmingham Birmingham Business School United Kingdom s.t.marinova@bham.ac.uk Cid Gongalves Filho Fumec University Nova Lima MG Brasil cid@consumer.com.br Gustavo Quiroga Souki Fumec University Nova Lima MG Brasil souki@consumer.com.br Marin Alexandrov Marinov University of Gloucestershire The Business School United Kingdom Mmarinov@glos.ac.uk Recived: 5 October 2009 Reviewed: 20 October 2009 Accepted: 27 October 2009 Abstract: This study analyzes the relationships between buyers and suppliers in South American automotive industry. The relations between buyers and suppliers can affect the supply chain performance as they impact stock levels, prices, operations flexibility, opportunistic behaviour, commitment and trust among the players. In the study, the transactional benefits, meaning, the advantages obtained by the customer from the service provider, are included to identify their impact on relationship satisfaction and relational commitment. A survey approach is used to evaluate the relationships of suppliers and buyers and interpret their behavioural intentions. Using Structural Equation Modelling, the impacts of relationship quality, commitment, trust and satisfaction have been tested, taking into account the behavioural intentions of buyers towards suppliers, their verbal communication and price sensitivity. The model combines the relational benefits from the quality of relationship approach and specifies how these relational benefits can influence two key results of a relationship - word of mouth communication and loyalty. The research findings suggest that opportunistic behaviour is an important construct in buyer-supplier relationships and must be managed and measured with care. The paper attempts to make a contribution to the understating of buyer-supplier relationships and proposes an analytical model for researching relationships in supply chain management. Key words: automotive industry, buyer-supplier relationships, perceived quality, trust, commitment, behavioural intentions ODNOS MED KUPCI IN DOBAVITELJI V AVTOMOBILSKI INDUSTRIJI JUŽNE AMERIKE Povzetek: V članku avtorji obravnavajo odnos med kupci in dobavitelji v avtomobilski industriji v Južni Ameriki. Odnosi med kupci vplivajo na uspešnost delovanja dobavne verige, saj imajo vpliv na raven zalog, cene, fleksibilnost operacij, oportunistično vedenje, predanost in zaupanje med udeleženci. Članek se osredotoča na transakcijske koristi, pomen in prednosti, ki jih ima kupec od dobavitelja storitev, s čimer želijo avtorji ugotoviti, kakšen je učinek na zadovoljstvo in predanost v odnosu kupec-dobavitelj. Za oceno odnosov in razlago vedenjskih namer med dobavitelji in kupci avtorji izvedejo raziskavo z uporabo strukturiranega anketnega vprašalnika. Z uporabo modela strukturnih enačb testirajo vpliv na kakovost odnosov, predanost, zaupanje in zadovoljstvo, pri čemer upoštevajo vedenjske namere kupca do dobavitelja, njuno verbalno komunikacijo in cenovno občutljivost. Model združuje koristi, ki izhajajo iz kakovosti odnosov in opredeljuje, kako lahko tovrstne koristi vplivajo na dve ključni vrsti rezultatov, ki izhajajo iz odnosa - komunikacijo od ust do ust in zvestobo. Rezultati raziskave kažejo, da je oportunistično vedenje pomemben gradnik v odnosu med kupcem in dobaviteljem, ki ga je potrebno previdno upravljati in skrbno meriti. Članek predstavlja prispevek k razumevanju odnosov med kupci in dobavitelji in predlaga analitični model za raziskovanje odnosov pri upravljanju dobavne verige. Ključne besede: avtomobilska industrija, odnos kupec-dobavitelj, zaznana kakovost, zaupanje, predanost, vedenjske namere 1. INTRODUCTION The car industry in South America has undergone rapid expansion that has led to more stringent competition, increased consumer choice, augmented alliance of quality with low cost, and greater intensity of technological innovation. Alongside these challenges, leading automotive manufacturers have strived to sustain their competitive advantages by improving the relationships with suppliers and other stakeholders. McKenna (1991, 1993) argues that relationship marketing should permeate all parts of an organization to achieve a dialogue between buyers and suppliers in business-to-business markets (Bruhn, 2003). This should lead to satisfaction of needs and long-term exchanges between suppliers and buyers. Morgan and Hunt (1994) have developed the view that relationship marketing represents a significant refinement of marketing theory and practice. In line with them, Gordon (1999) has suggested that the marketing mix approach is too limited to provide a usable framework for assessing and developing buyer-supplier relationships in many industries and should be replaced by the relationship marketing alternative model where the focus is on relationships and interaction over time, rather than markets and products. Gordon (2000) also emphasizes that relationship marketing, although embedded in traditional marketing theory, brings a different conceptualization. This study focuses on the way in which perceived quality of buyers and suppliers' satisfaction interacts with the relationships impact on behavioural intentions of suppliers. The interaction of the above constructs in a structured nomological chain is also investigated. Although the business-to-business market encompasses a huge amount of transactions, studies researching the perceived quality of buyers and the behavioural intentions of suppliers, are limited. Among other reasons, difficulties with data collection could be a contributing factor. 2. LITERATURE REVIEW The wider meaning of marketing refers to activities developed in order to generate and facilitate exchanges satisfying human necessities and desires (e. g., Semenik and Bamossy, 1995 Etzel et al., 2001; Gronroos, 2004). Critics to the traditional notion of marketing emphasize its exclusive transactional nature (e.g. Broadie et al. 1997; Jüttner and Wehrli, 1994). The transaction approach to marketing faces many challenges (Nicholls and Roslow, 1988). According to Gronroos (2004), the majority of business-to-business markets are mature, with a surplus of supply where buyers are becoming increasingly difficult to find. This situation led to the increased importance of buyer retention. Extant literature has predominantly studied the importance of creating value in buyer-supplier relationships from the perspective of the buyer. Cannon and Homburg (2001) have developed a model that explains how the supplier behaviours and the management of suppliers affect a buyer firm and buyer's intentions to expand future purchases from the supplier. Hennig-Thurau et al. (2002) have suggested the use of integrative model of key determinants of the results of relational marketing in the context of social and service exchanges. The model combines the relational benefits from the quality of relationship approach and specifies how these relational benefits can influence two key results of a relationship - word of mouth communication and loyalty. The key variables model of Morgan and Hunt (1994) evaluates the strength of commitment as a mediating variable of the key determinants of relationship marketing. In a survey-based field study of 1,068 business customers of a manufacturer of hydraulic and pneumatic equipment Chakraborty et al. (2007) have found three drivers of customer satisfaction, namely, reliability, product-related information, and commercial aspects. In this study, the transactional benefits, i.e. the advantages obtained by the customer from the service provider, are included to identify their impact on relationship satisfaction and relational commitment. For the purposes of the research, conceptual definitions of the components of the proposed hypothetical model are provided in order to explain the constructs involved: Satisfaction: Obtaining satisfaction means receiving a satisfactory response from a consumer in a purchasing or service relationship. It is the judgment made of a feature of a product or a service which has given or gives agreeable or pleasurable levels of consumption (Oliver, 1980). In other words, the experience coming from an act of consumption generates satisfaction whenever what is received is equal to or better than what has been anticipated. Commitment: It is an exchange where a partner believes that continuing to maintain a relationship with another party is of such an importance that he/she would do their utmost to maintain the relationship, that is, the committed party believes that it is worth the effort to guarantee that the relationship continues indefinitely (Morgan and Hunt, 1994). Commitment may also mean that a company or a person, as part of a relationship, feels, to a degree, motivated to do business with the other partner (Gronroos, 2004). Perceived Quality: Since it is a topic that has been widely accepted by many areas of research, the concept of quality has many diverse definitions. According to Gronroos (2004), quality may be conceptualized as "the level of excellence that a company chooses to attain in order to satisfy its target customers and, at the same time, the extent to which it manages to reach this level". Slack et al. (1997) support the notion that quality should consistently comply with customer expectations. Adoption of a user-centred definition of quality means the user's perception of quality is put in focus. Taking a different perspective, Zeithaml et al. (1996) have defined perceived quality as the consumer's judgment about the general excellence or superiority of the product or service. Perceived quality is divided conceptually into two elements: product quality, which consists of the quality of the physical product's attributes and the quality of the services. The latter aspect of perceived quality represents the interactive association between the customer and the elements of the service, such as, the behaviour of the company's employees (Zeithaml, 1988). Word of Mouth Communication: According to Hennig-Thurau et al. (2002) this is the informal communication between customers and other people relating to the evaluation of goods or services, including reports of pleasant or new experiences, recommendations to others and the person's own particular recommendations. Trust: Morgan and Hunt (1994) conceptualize trust as existing when one party has confidence in an exchange party's reliability and integrity. Developing further this concept, Zaheer et al. (2006) have investigated the determinants and outcomes of trust in buyer-supplier relationships and how trust relates to supplier performance. Moorman et al. (1993) define trust as willingness to rely on an exchange partner in whom one has confidence. The prevailing view of extent literature suggests that confidence of one party on the trusting party results from the solid belief that the trustworthy party is reliable and has high integrity. These are associated with such qualities as consistency, honesty, responsibility, and benevolence. Behavioral Intentions: Zeithaml et al. (1996) have proposed that service quality has a direct impact on behavioural intentions of customers that could be favourable or unfavourable. Existing research suggests that positive things relate to actions such as recommend, remain loyal, spend more, and pay premium prices. Meanwhile negative things relate to complaints. Overall, less business with a company is a possible behavioural intention that could be caused by the level of perceived service quality provided by the entity in question. Opportunistic Behaviour: Semeijn et al. (2006) define opportunism as self-interest seeking with guile and it includes overt behaviour such as lying, cheating and stealing, as well as subtle behaviour such as dishonouring an implicit contract, avoidance, and failing to fulfil promises and obligations (Jap, 2001). Opportunistic behaviour can be explained using agency theory, which is concerned with the relationship between a superior (a principal, e.g. a buyer) and a subordinate (an agent, e.g. a supplier). Because there is an imbalance of power in the relationship, it is likely to have a divergence of interests between the principal and the agent and the possibility of opportunism exists. In the agency literature, it is assumed that the buyer (principal) has more power than the supplier (agent). This power increases if the supplier (agent) has to purchase specific assets. Morgan and Hunt (1994) found that perceived opportunistic behaviour by a party will lead to decreased trust in the relationship between the parties. 3. RESEARCH MODEL AND HYPOTHESIS FORMULATION The research hypotheses have been defined on the basis of the constructs outlined above and using previous research on relationship marketing (Hennig-Thurau et al, 2002; Arnett et al, 2003; Morgan and Hunt, 1994, Fornell et al. 1996, Churchill and Peter, 2000). Figure 1 is a graphic presentation of the developed hypothetical model. On the basis of the above presented model the following hypotheses are proposed: H1: There is a positive impact of perceived quality on supplier's satisfaction. H2: There is a negative impact of opportunistic behaviour on supplier's trust. H3: There is a positive impact of perceived quality on supplier's mouth to mouth communication. H4: There is a negative impact of satisfaction on supplier's complaint intentions. H5: There is a positive impact of satisfaction on supplier's commitment. H6: There is a positive impact of trust on supplier's commitment. H7: There is a negative impact of opportunistic behaviour on supplier's intentions to look for new buyers. Figure 1: Hypotheses Supporting Research Model 3.1. EXPLORATORY PHASE -DEVELOPMENT OF MEASURES The measurements of the constructs have been accomplished in a series of steps. Firstly, with base in the defined constructs, the items of measurement of the constructs have been obtained from previous research. The scales have been altered for 11 points, seeking the treatment of variables as continuous. In the second stage, the list of the constructs and measurement items has been submitted to a panel of marketing specialists. A pre-test with 50 respondents has been carried out and analyzed. The resulting indicators of the constructs are presented in Table 1. 3.2. OPERATIONAL PHASE The research was conducted in 2007. One hundred and thirty-five answers have been obtained from the biggest suppliers of one of the largest automotive manufacturers in South America. The respondents accounted for more than 80 percent of the value of the purchases of the buyer. About 24 percent of the suppliers were large and had more than 1,000 employees. More than 50 percent of the suppliers had more than 20 years of relationships with the buyer. All suppliers participating in the research were sent an electronic version of the questionnaire with an ID and a password. The questionnaire was accompanied by a letter inviting the supplier to participate in the research. Armstrong and Overton (1977) suggest that it can be considered that the profile of the respondents of the last 25 percent of received questionnaires will resemble the profile of the non respondents for mailed research. Because of that a comparison of the 75 percent of answers of initial respondents has been made with the answers of the final 25 percent of respondents. This comparison has been considered as an element to the averages of the constructs (Armstrong and Overton, 1977; Li and Calantone, 1998). Such a test has allowed for verification of non-response bias, and has shown significant statistical difference at the level of 5 per cent between the averages of the constructs. Verification for not presentation of the non-response bias has been conducted. 3.3. EXPLORATORY ANALYSIS OF THE DATA The exploratory analysis of the data followed methodologically a series of stages to explore the data and verify some requisites of multivariate Table 1: Operationalization of Constructs used in the Model Constructs Sources and Meaning Perceived Quality of Buyer Fornell et al. (1996), Zeithaml et al. (1996) and the specialists panel. Composed of 6 factors: - ordering, - product development, - cost analysis, engineering, - cost reduction, - operations and parts. Satisfaction Oliver (1997) - psychological aspects of satisfaction formation and its applicability to all product or service categories. Opportunistic Behaviour Morgan and Hunt (1994) - perceived opportunistic behaviour by a party will lead to decreased trust in the relationship between the parties. Trust Morgan and Hunt (1994) - trust between parties exists when one party has confidence in an exchange party's reliability and integrity. Commitment Morgan and Hunt (1994) - an exchange where a partner believes that continuing to maintain a relationship with another party is of such an importance that he/she would do their utmost to maintain the relationship, that is, the committed party believes that it is worth the effort to guarantee that the relationship continues indefinitely. Behavioural Intentions Fornell et al. (1996) , Zeithaml et al. (1996) and the specialists panel. These include: - service quality has a direct impact on behavioural intentions of customers, - customization is more important than reliability in determining customer satisfaction, - customer satisfaction is more quality-driven than value- or price-driven. analysis; treatment of missing values; treatment of reverse items; analysis of outliers (uni- and multi-variety); analysis of normality; analysis of linearity. 3.4. VALIDITY OF THE MEASUREMENTS Construct Unidimensionality Firstly, a factorial analysis of the items has been executed by construct to verify the unidimensionality, as suggested by Germain et al. (1994). The behavioural intentions construct consisted of a list of all possible intentions presented in the literature and suggested by the panel of marketing specialists (see Table 1), by the buyers and in the personal interviews with suppliers. An exploratory factor analysis has been accomplished, and it has been verified for the suppliers. The behavioural intentions can be explained by the following three factor structure: • Complaint: refers to personal and professional complaints made by suppliers to organizations (other suppliers), friends, employees, family and to justice, using their contractual rights; • Mouth-to-mouth communication: positive recommendations provided by suppliers to family, friends and other suppliers. • New buyers: when the suppliers intend to look for new customers, who could provide more attractive business conditions to glade their products with better margins. Due to the characteristics of the construct and its complexity (6 dimensions and 59 items), the perceived quality construct has been evaluated using a confirmatory factor analysis. The items presented adequate convergent validity, with significant weights at 5 per cent level. All others constructs corresponded to the requirement of unidimensionality. Analysis of Reliability - Cronbach Alpha With the exception of the construct "New Buyers" (alpha =0.45), all others constructs reached a value of Cronbach alpha above 0.75. Discriminant Validity Discriminant validity was accomplished using the procedure recommended by Bagozzi et al. (1991). Convergent Validity To verify the convergent validity of the constructs, each construct has been submitted to a confirmatory factor analysis, observing the significance of each item load in the respective constructs. Such a procedure has been indicated by Bagozzi et al. (1984), and by Im et al. (1998). 4. RESULTS Structural Equations - Methodology and Technical Application According to Hair et al. (1998), structural equations have been used in the study of varying fields including marketing, administration, organizational behaviour and even genetics. The reasons for this fact are: (1) they provide a method to work simultaneously with multiple relationships, while statistically efficient; (2) have the ability to evaluate the relationships and provide a transition of exploratory analysis to confirmatory analysis. This study opted for direct estimate, using the covariance matrix advised by Hair et al. (1998). The normality premise is particularly important when choosing the estimate method. The method Maximum Likelihood - ML, has been a commonly used approach in structural equation modelling. Byrne (1995) also argues in favour of the use of ML due to its robustness with relationship to small deviations of the multivariate normality. The structural relationships for validation of hypotheses and models were accomplished using AMOS 4.0 of SPSS. The model is presented in Figure 2. The model |x2/g.l=2,18|GFI=0,87|AGFI=0,77|HOEL TER=62) has relative stability. Absolute adjustment does not exist because p-value is less than zero. The value of RMSEA is smaller than 0.08 indicating an acceptable adjustment of the model. The incremental fit measures are greater than 0.9 (NFI=0.909. TLI=0.933), which is advisable according to Hair et al. (1998). Other indexes of incremental adjustment (GFI, AGFI, NNFI, CFI) are adequate and near the critical value of 0.90. Other results that contribute to the acceptance of the model are the normalized chi-square (X2/gl) whose value should be inferior to 3.0, as proposed by Latif (2000). The normalized chi-square in this study is 2.18, which means that the model is acceptable. Testing of Hypotheses Table 2 presents the results of the testing of the hypotheses Table 2: Evaluation of the hypothetical relationships Hypotheses Hypothetical Relationship Result H1: There is a positive impact of perceived quality on supplier's satisfaction Positive Confirmed1 H2: There is a negative impact of opportunistic behaviour on supplier's trust Negative Confirmed2 H3: There is a positive impact of perceived quality on supplier's mouth to mouth communication Positive Confirmed1 H4: There is a negative impact of satisfaction on supplier's complaint intentions Negative Confirmed2 H5: There is a positive impact of satisfaction on supplier's commitment Positive Confirmed1 H6: There is a positive impact of trust on supplier's commitment Positive Confirmed1 H7: There is a negative impact of opportunistic behaviour on supplier's intentions to look for new buyers Negative Confirmed2 1 Estimate is positive and significant 2 Estimate is negative and significant 5. DISCUSSION OF THE RESULTS An initial analysis of the model, from the viewpoint of the antecedents of relationship satisfaction, suggests that perceived relationship quality (B = + 0.76) has a strong impact on satisfaction. It was also verified that opportunistic behaviour has a strong impact on trust (B = -0.77). Opportunistic behaviour is a common practice in the South American automotive industry due do the concentration of power of the buyers in this competitive context that involves huge amounts of money and a relatively small number of players. Trust has a significant impact on commitment (B = + 0.28). Commitment can be considered an important indicator of relationship quality and long-term intentions to invest in the relationship. The significant impact of opportunistic behaviour on "New Buyer" (suppliers searching for new buyers that could offer more attractive conditions), indicates that opportunistic behaviour must be an important managerial and strategic dimension that must be measured and adopted with restrictions, because it could probably have an impact on suppliers behaviour in the long term. It was also observed that relationship satisfaction has a strong impact on commitment (B = + 0.23). To obtain commitment, buyers must create trust (that can be maximized through reduction of opportunistic behaviour) and satisfaction in suppliers. As satisfaction is a transitory feeling, the creation and maximization of commitment looks like a good strategy to develop strong relationships with suppliers. The impact of the satisfaction on mouth to mouth communication (B = + 0.51) demonstrates the importance of satisfaction for obtaining behavioural intentions that can contribute to the image of the organization among suppliers. This finding is in line with the findings of the research conducted by Veiga (2002) and demonstrates that the satisfaction is an effective means for obtaining positive behavioural intentions. On the other hand, it has been observed that satisfaction has a strong negative impact on complaint (B = -0.30). This finding also reinforces the notion that perceived quality and relational satisfaction are important elements in relationship marketing in the South American automotive industry. 6. CONCLUSIONS Managerial Implications Research findings suggest that supply managers must measure and manage supplier's relational satisfaction and perceived quality of buyers as fundamental elements to obtain positive behavioural intentions: positive mouth to mouth communication, reduced complaints and new buyer-seeking behaviour. It has also been found that opportunistic behaviour has a seminal impact on trust and commitment (indirect effect), and also a covariance (- 0.66) with perceived quality of buyers. These findings suggest that opportunistic behaviour is an important construct in buyer-supplier relationships and must be managed and measured with care. Academic Implications The results of this study are based on data that were particularly challenging to collect as big organizations and significant transactions were involved. 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