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

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“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. 96
insurance premiums. Hence, perceptual judgments (that are the basis for perceptual data) do not always accurately represent reality. The third mental short cut is an adjustment from an anchor (Cassidy, 2009, p. 197; Tversky & Kahneman, 1974), which means that managers use reference points for decisions. If, for instance, current market conditions are the reference point, then managers would assume that market conditions will not change a lot in the future. This mental adjustment because of an anchor leads to confirmation biases or interpreting evidence to confirm their predispositions based on their reference points (Cassidy, 2009, pp. 196-197). Alternatively, it can be counter argued that B2B managers, humans will think laterally (Zaltman, 2003), use mental short cuts, and rely on perceptual metrics. However, most firms at the end of the day have to justify their marketing expenditures to the finance department, and unless performance shows up on financial or objective metrics, it is unlikely that a relationship will continue (Bolton, 2004; Srivastava, Shervani, & Fahey, 1998). Hence, using perceptually based measures or evaluations has many weaknesses. Objective metrics have some advantages over subjective metrics. Objective metrics are suitable for a long-term focus, whereas subjective metrics can at best be used for the short term (Rajan & Reichelstein, 2006). Moreover, objective metrics are externally verifiable, whereas subjective metrics are not (Rajan & Reichelstein, 2006). External verification makes objective metrics more transparent and reliable than subjective metrics. For strategic buyers, this objectivity would mean that an income statement would reflect a manager’s position that a certain supplier is reducing its costs and therefore increasing its profits. Objective metrics are standardized by procedures such as generally accepted accounting principles (GAAP). This standardization should make it easier for channel partners and strategic customers to communicate the value generated to external stakeholders who understand how these standardized performance measures were calculated. Furthermore, it makes it easier to benchmark suppliers against each other and see who is generating more value for the firm. Objective measures are comparatively readily accepted by financial institutions compared to subjective metrics. Therefore, it is easier to acquire access to capital when a company can prove performance via objective metrics. Hence, objective indicators are important to business, and any marketing investment (e.g., in relationships or philosophies such as market orientation) by the firm needs to be translated into financial language. This ensures that marketing keeps receiving a fair allocation of the firm’s overall budget (Bolton, 2004). The study in Chapter 2 has made a significant contribution to the understanding of supplier marker orientation and idiosyncratic relational risk (IdRR). The study posited that supplier responsiveness and IdRR are negatively and not positively associated. The findings are based on subjective or perceptual data. Against the background of the study in Chapter 2, we question whether the results are robust and would stand if both subjective and objective performance measures are used. Thus, we use a structural model based on accounting data and compare it with the original perceptual data model in Chapter 2. We define subjective performance measures as heuristic individual evaluations of a firm’s performance. Such evaluations are not as static for the firm at the corporate level as accounting or financial results are; they vary from respondent to respondent. Subjective evaluations or measures reflect the general understanding of the manager. We assume that the reliability of such measures increases when managers acquire experience and an understanding of the markets in which they operate. Objective performance measures are calculated using standardized accounting and financial procedures. Objective measures also 97
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ISBN 978-90-8980-055-8 © M. Abrahi
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Examination Committee Supervisor: P
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2.3 DEVELOPMENT OF THE CONCEPTUAL M
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5.1 RESEARCH FINDINGS 114 5.2 OVERA
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List of Tables Table 2.1 Representa
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PREFACE Oscar Wilde once said, “I
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Chapter 1 Introduction to the Thesi
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Figure 1.1 Mckinsey Survey Results
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1.4 Scope PhD thesis This thesis fo
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Netherlands. We used the maximum li
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2.1 Introduction A central tenant o
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only provide an assessment of the s
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Table 2.1 highlights several promin
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other hand, they later argue that m
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Therefore, there is a convergence i
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usiness performance, firms need to
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means is that the more better a str
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Supplier responsiveness or market o
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Naryandas, 1995). Further, idiosync
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They might also include the ease wi
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they ask about intimate supplier in
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Table 2.2 Modified Items of the MAR
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1. The name of the company where yo
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9.The supplier seems to have good i
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17. The supplier takes a very long
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25. If the supplier were to find ou
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33.Does your strategic supplier als
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41.To what degree do those specific
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Supplier Brand Value 51.How likely
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Appendix B Scatter Plot Diagrams fo
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