Essays on supplier responsiveness and buyer firm value - Nyenrode ...

“It is one of the commonest of mistakes to consider that the limit of our power
of perception is also the limit of all there is to perceive.”
—C. W. Leadbeater (n.d.)
"On the face of it, shareholder value is the dumbest idea in the world."
—Jack Welch
Former CEO, General Electric (Guerrera,
2009).
4.1 Introduction
The financial crisis of 2009 is an example of the incongruence between subjective and
objective measurement. Prior to the financial crisis, many firms had benefitted because of
investors’ irrational exuberance about financial markets (Akerlof & Shiller, 2010). This
benefit occurred even though many firm’s objective financial indicators did not reflect such
exuberance. The outcome of the dissonance between subjective and objective measurement
can be grave, as is illustrated by the large number of bankruptcies in 2009. Similarly, in the
market orientation literature, numerous studies have included objective and subjective or
perceptual measures and have contradictory or different results (Jaworski & Kohli, 1993;
Narver & Slater, 1990). We define subjective metrics as those based on managerial
heuristics and objective metrics as those based on some externally verifiable accounting or
financial procedure.
All subjective or perceptual data are based on human perceptions. Human
perceptions are notoriously fickle and not necessarily a representative of market realities
(Cassidy, 2009, pp. 10-11). This is not because people or managers are irrational, but rather
because their limited mental capabilities do not at times allow them to process all the
complicated factors or indicators (Cassidy, 2009, pp. 10-11). Furthermore, managers 4
usually only remember more recent events (Foer, 2011). This is a weakness when
measuring supplier performance because the relationship is based on a continuum of
interactions, not just the most recent interactions. Tversky and Kahneman (1974)
investigated heuristics or mental short cuts. The first mental short cut is representativeness,
meaning that managers generalize with insufficient evidence (Cassidy, 2009, p. 195;
Tversky & Kahneman, 1974). Even when experimental subjects were provided with
statistical data to guide their decisions, they still jumped to conclusions for which they did
not have much evidence (Cassidy, 2009, pp. 195-196). This jumping to conclusions also
leads to the phenomenon of overconfidence, which has led to many financial fiascos
(Cassidy, 2009, pp. 195-196). Managers who are overconfident take short-term relational
trends with strategic suppliers as indicators of the long-term trends. This overconfidence
could have serious repercussions if firms get stuck with adverse long-term consequences
they did not anticipate. The second mental short cut is the availability of scenarios (Tversky
& Kahneman, 1974). Managers' experiences dictate how likely they are to perceive that an
event is to occur (Cassidy, 2009, pp. 196-197). For instance, many reinsurance 5 companies
will not insure for a calamity after it has occurred (Greeley, 2011). Even though the
likelihood of another natural disaster is extremely low in an area in which one has already
occurred, managerial perceptions sway reinsurance managers from providing coverage for
such disasters in the future because this is an extreme situation that they fear. This means
that they exclude a lucrative potential market from which they could generate future
4 The terms "people" and "managers" are used interchangeably in this Chapter.
5 Reinsurance companies insure insurance companies.
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