Embeddedness, interdependence, and opportunism in organizational supplier-buyer networks

Journal of Management, Winter, 1993 by Keith G. Provan

In recent years, the transaction cost economics perspective of Williamson (1975;1985) has been adopted by organization theorists as one way of helping

to       explain vertical relations between organizations (c.f. Barney &
Ouchi, 1986;    Williamson & Ouchi, 1981; Hill, 1990). According to this view,

the uncertaintiesof market relationships coupled with the bounded rationality of decision makers makes it likely that suppliers and buyers will seek to

routinize their          transactions by developing more established repeat
relations with each other.   However, such relations create mutual
dependencies, based on what Williamson    refers to as asset specificity and
small numbers conditions. These conditions   enhance the likelihood of

opportunistic behavior, or "self-interest seeking withguile", resulting in

intolerable transaction costs. When this happens, the      market relationship
will fail giving rise to a hierarchy (i.e. vertical         integration).

Transactions then become internalized, eliminating the uncertaintyof the market and protecting against opportunism through a formal governance s tructure.

One concern some writers have had with this line of thinking is that organizations that are not vertically integrated often do not engage in market-based relations with many of their suppliers or buyers, but instead, purposely establish and maintain long-term, cooperative, voluntary (i.e. non-owned) supply or distribution relationships as a way of competing more effectively with firms outside the relationship (Jarillo, 1988; Powell, 1990; Walker & Poppo, 1991). In the U.S., these arrangements have become particularly prominent in the automobile and electronics industries since the

arrival of     Japanese manufacturers in the 1980s and their just-in-time
inventory system     (Frazier, Spekman, & O'Neal, 1988; Helper, 1993).

While cooperative supplier-buyer forms of various types have recently become an important addition to the transaction cost economics-based literature (c.f. Dwyer, Schurr, & Oh, 1987; Frazier et al., 1988; Heide & John, 1988; Hill, 1990;Williamson, 1991), by far the predominant focus has been on dyadic

exchanges.   Yet a critical aspect of such exchanges is that they are often
embedded in a    broader network of supplier-buyer relations. In his
well-cited article on the   subject, Granovetter (1985) argues forcefully that

social embeddedness provides a powerful incentive to limit opportunistic acts, and that traditional economic arguments fail "to appreciate the extent to which ... dyadic relations are themselves embedded in broader systems of social relations". These arguments areparticularly salient for examining relationships within established networks of suppliers and buyers since embeddedness is an explicit and inherent characteristic of such systems. Despite frequent discussion of networks in the recent literature in economics, organization theory, strategic management, and sociology, there have been no attempts to understand exactly how specific aspects of network structure affect the opportunistic behavior of member firms. Building on Granovetter's ideas, it is proposed here that the structural properties of a network, specifically,

firm-network embeddedness and overall network interdependence, create incentivesfor cooperation and long-term commitment

while constraining opportunism. The    general thesis of this paper is that
under conditions where overall network     interdependence is high, the
opportunistic behavior of an individual supplier   relative to the dominant

network buyer will decline as the embeddedness of the supplier in that network increases. The discussion that follows provides a rationale for development of the model and offers specific hypotheses concerningthe extent to which opportunism is likely to emerge under particular network c onditions.

Throughout the article, discussion will focus primarily on networks of multiple suppliers and a single, dominant buyer or hub firm. While not all networks look like this, it is a common form and makes discussion and development of the basictheoretical arguments manageable. Conclusions for supplier dominated networks are identical to those made for buyer dominated networks except that the focus would be on the opportunistic behavior of buyer firms relative to the supplier hub firm. Opportunism is defined as those conscious behaviors engaged in by the management of a dependent supplier

firm to influence the decisions of the       dominant buyer through deceit and
guile in ways that are presumed by the        supplier to enhance its position
or outcomes, usually at the expense of other   network members.

Dyadic Exchanges Versus Networks

In a Williamsonian market or relational contract (MacNeil, 1980), the relationship between each individual supplier and a common buyer, even in an established network, is presumed to be independent of every other supplier-buyerrelationship within the network. Thus, the emergence of opportunism in any one supplier-buyer dyad would be based solely on the characteristics of that dyad, while the consequences of the opportunistic