Risks and Opportunism in Business Relationships

Establishing a customer-supplier relationship creates tension between safeguarding (ensuring predictable solutions) and adapting (allowing for flexibility for unanticipated events). Vertical coordination can facilitate stronger customer-seller ties but may also increase the risk to the customer’s and suppliers specific investments.60 Specific investments are expenditures tailored to a particular company and value chain partner (investments in company-specific training, equipment, and operating procedures or systems).61 They help firms grow profits and achieve their positioning.62

When buyers cannot easily monitor supplier performance, the supplier might not deliver the expected value. Opportunism is “some form of cheating or undersupply relative to an implicit or explicit contract.”63 It may entail self-serving violation of contractual agreements or an unwillingness to adapt to changing circumstances in satisfying contractual obligations. Opportunism is a concern because firms must devote resources to control and monitoring that would otherwise be allocated to more productive purposes. Contracts may become inadequate to govern supplier transactions when supplier opportunism becomes difficult to detect, when firms make specific investments in assets they cannot use elsewhere, and when contingencies are harder to anticipate. When a supplier has a good reputation, it is more likely to avoid opportunism to protect this valuable intangible asset.

< Prev   CONTENTS   Source   Next >