An Investigation of Conflict Resolution between Buyers and Suppliers in Strategic Long-Term Cooperative Relationships
James L. Patterson, C.P.M.
James L. Patterson, C.P.M., Assistant Professor of Management, Western Illinois University, Moline, IL 61265-5830, 309/792-5330
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Abstract. Over the past two decades, North American and European companies, seeking competitive advantage in a fast-paced global marketplace, have been making the transition from traditional, adversarial buyer-supplier relationships toward more cooperative buyer-supplier "partnerships" in which there are significant information sharing and collaborative goal setting activities. Up to this point, however, the preponderance of the literature has only addressed relationship development issues such as:
- how to start up a cooperative buyer-supplier relationship,
- how to choose an appropriate "partner," and
- how to identify the risks and benefits of cooperative interorganizational relationships.
This attention to the initial phases of developing cooperative buyer-supplier relationships has created a gap in the knowledge of exactly how these increasingly popular forms of exchange relationships are effectively managed over time. Early attempts have focused primarily on identifying the characteristics of successful cooperative buyer-supplier relationships. This paper and workshop (based on the author's dissertation research at Michigan State University) seeks to extend the research domain by investigating how interorganizational conflict between cooperative buyers and suppliers originates and how purchasing managers attempt to minimize the potentially disruptive impact of conflict to the health and welfare of the relationship.
This paper and presentation also discusses the nature of interorganizational conflict and presents two models, the Levels of Conflict Model, which proposes that interorganizational conflict can be viewed as having several levels, each of which has different implications for managing conflict and the Conflict Feedback Model which combines the Levels of Conflict Model with existing conflict management research.
Introduction. Western researchers and practitioners in North America and Europe alike have sought to emulate Japanese competitive advantage through the introduction of cooperative interorganizational relationships (IORs), also referred to as strategic alliances or "partnerships." Mohr and Spekman's (1994) definition of partnership is representative of others in the literature, "[P]artnerships are defined as purposive strategic relationships between independent firms who share compatible goals, strive for mutual benefit, and acknowledge a high level of mutual interdependence. They join efforts to achieve goals that each firm, acting along, could not attain easily." However, it is technically improper to identify such cooperative IORs as partnerships because that description implies a legal form of organization.
Conflict inevitably occurs when two or more contracting parties, who typically possess different and often contrasting goals and objectives, become more intimately intertwined with each other in a cooperative "partnership" and continue their interaction over time at a greater magnitude. The results of IOR conflict can influence the ongoing relationship between the parties. Ring and Van de Ven (1994) discuss how IORs develop and change over time. One of their key observations is that, "[i]nteraction processes among cooperative parties may cast a positive, neutral, or negative overtone to the relationship, influencing the degree to which parties settle disputes arising out of the IOR." This implies that resolving conflict between cooperative parties must take into consideration the long-term effects of the resolution process, as well as the nature of the conflict itself.
Research Questions. Three basic research questions serve as the underlying motivation of this research. They are:
- "What are the critical factors and conditions which affect the level of conflict experienced between industrial buyers and suppliers in established strategic long-term cooperative relationships (SLCRs)?"
- "How do industrial buyers and suppliers in established SLCRs view the relative impact of these factors and conditions on the relationship?"
- "Are there significant differences regarding the perceptions of buyers and suppliers in SLCRs concerning the actual and potential causes and effects of conflict?"
Adversarial versus Cooperative Buyer-Supplier Relationships. The traditional, or adversarial, buyer-supplier relationship is typified by multiple sourcing, competitive bidding, and short-term contracting in which both buyer and supplier display low levels of trust regarding the motives and actions of the other. This kind of buyer-supplier relationship is characterized by "arm's length" business dealings with each other, involves minimal information sharing, and focuses intensely on a market-based price. The length of the relationship between buyer and supplier may only last until the next contract award period or until the supplier fails to live up to all of the legalese of a lengthy and detailed contract.
Multiple sourcing has been the traditional mode of dealing with suppliers due to the perception of buyers that sufficient marketplace competition between potential suppliers will result in the lowest possible contract price. Secondly, competitive bidding has been favored by buyers to aggressively drive down prices, resulting in supplier profits reduced to bare minimums in the quest to find the lowest possible price. Short-term contracting has also been felt to provide the traditional buyer with adequate flexibility to switch sources of supply in the event that an even lower price can be found. The basis for supplier selection is grounded strictly on the product or commodity being procured and is most often measured in terms of price or some other specific performance metric. In addition, it is likely that bargaining power between the buyer and supplier will be asymmetrically distributed with one party controlling the other.
The key elements of a cooperative buyer-supplier relationship are included in Ellram's (1990) definition, "a mutual, ongoing relationship involving a commitment over an extended time period, and a sharing of the risks and rewards of the relationship." Outsourcing partnerships involve a focus on the basic core competencies of each party to the relationship. In the current global business environment, it is unrealistic for each firm to concentrate on all aspects of their business simultaneously and maintain a competitive level of expertise in each. Therefore, buying firms try to locate suppliers who:
- can provide higher quality goods and services,
- are highly capable of maintaining expertise in the latest technologies, and
- are willing to enter into long-term cooperative agreements with certain buyers such that each firm can concentrate on those core competencies which give them a competitive advantage in the marketplace.
Bargaining power in strategic long-term cooperative relationships is more likely to be equitably shared between buyer and supplier. The focus of the relationship tends to be more strategic in nature with both buyer and supplier willing to freely share information regarding their future plans, goals, and objectives. The relationship may also be distinguished through extensive use of congruent goals and objectives for the partnership, recognizing that mutual success of the SLCR can be achieved through both parties' continued collaboration and information sharing.
The Nature of Conflict. Conflict, as used in this forum, can be defined as a condition of a strategic cooperative long-term relationship (SLCR) between a buyer firm and a supplier firm in which one or both of the parties' goals and objectives, regarding the performance of the SLCR, are not being achieved or are reasonably expected not to be achieved in the foreseeable future. This definition of buyer-supplier conflict is similar to previous definitions of marketing channel conflict, such as Gaski (1984), which address goal frustration and behavior perceptions.
When two or more parties come into extended contact with each other and continue to interact extensively over time, conflict is an inescapable result of the long-term relationship. However, this is not to say that conflict, in and of itself, is necessarily a dysfunctional activity that must be avoided at all costs. Tjosvold (1993) and other management writers provide descriptions of the various benefits of "cooperative conflict." These lists include:
- problem awareness,
- improved solutions,
- productivity improvements,
- organizational change,
- personal development,
- knowledge and creativity,
- psychological maturity,
- morale, and
- challenge and fun.
Other benefits include lessening social tensions between groups, readjusting relationships between groups, sustaining feedback about the relationship and its performance, and creating a strong sense of group identity by clarifying differences and boundaries between the conflicting parties. However, this investigation is primarily concerned with the potentially deleterious effects of SLCR conflict which require management attention to prevent degradation of the intended nature of the buyer-supplier relationship.
Antecedent Conditions for Conflict. In order for potentially destructive conflict to occur between organizations, several antecedent conditions must be satisfied. The first condition, interdependence of the two organizations, means that the two groups rely on each other for such activities as mutual assistance, information sharing, compliance to rules, regulations, and/or norms, performance feedback, or any other actions through which the organizations coordinate their respective activities. If there is no commonality between the two organizations, then each group is indifferent as to the activities of the other; hence, no conflict or potential for conflict exists.
The second antecedent condition necessary for conflict is called political indeterminism, which means that the relative power between the groups is subject to question or interpretation. If the relative power between the two organizations is clearly defined, then no conflict exists. The party having the greater relative power can force the other party to submit to its will. Under conditions of political indeterminism, however, individual organizations are more likely to gamble on pressing their own position or to "cheat" on the relationship because of the uncertainty over which group has the higher level of relative power.
Firms that are involved in newly-developed buyer-supplier relationships are more likely to flex their individual organizational muscle than those involved in more established mature relationships. Even in SLCRs, relative power differentials can occur due to changes in the two organizations' internal or external environments, such as the marketplace, competitors, substitute products, or governmental regulation. Also, internal changes such as new key personnel, different management policies and guidelines, and organizational structure can impact the nature of the SLCR. In other words, any internal activity or external environmental change which dramatically alters the power status quo within the relationship satisfies the second antecedent condition through the introduction of uncertainty into the relationship.
The third antecedent condition of diversity, unlike the current connotation in popular management writings, is defined as the differences or disagreements between organizations which come about due to varying, or competing, goals and objectives. The potential for conflict in a SLCR will increase if the organizational goals of the parties are not highly congruent or compatible with each other. The buyer's goals in terms of price, delivery, product quality, or service flexibility may differ greatly from those sought after by the supplier.
Stages of Conflict Development. Like negotiation, conflict is less of a single, discrete event and more of an ongoing process of interaction and interrelationship between two or more parties. Pondy's (1967) writings describe the conflict process as consisting of a series of five stages:
- latent conflict,
- perceived conflict,
- felt conflict,
- manifest conflict, and
- conflict aftermath.
Latent conflict is the situation where the parties are not fully aware of the presence of conflict, or at best, only dimly perceive the dispute. There are three sources of latent conflict:
- competition for scarce resources,
- drives for autonomy, and
- divergence of goals.
The second stage, perceived conflict, is where the difficulties or differences of opinion between the parties are readily identified and understood, and all the parties have now been made explicitly aware of the conflict. Felt conflict, the third stage, is characterized by the addition of emotions, such as anger, fear, resentment, tension, and anxiety, into the conflict. It is in this stage where tensions are internalized by individuals in each party and where the negative consequences of dysfunctional conflict begin to occur.
Manifest conflict is distinguished by openly aggressive behavior which is intended to frustrate or block achievement of the other party's goals and objectives. The final stage of conflict aftermath is concerned with how the future of the relationship is influenced by whether the conflict is resolved to the satisfaction of the parties. If the conflict is resolved to the general satisfaction of both parties, then the basis for more cooperative future relations can be established and the likelihood of recurrent conflict reduced.
Process Model of Conflict. Cadotte and Stern (1979) developed a process model of conflict that describes five critical elements of conflict:
- conflict potential,
- dependence (and its inversely related condition of power),
- conflict perception,
- resultant force, and
- conflict aftermath.
As in Pondy's stages of conflict development model, this model incorporates a feedback mechanism by which future conflict episodes are flavored or influenced by previous conflict resolution results.
Conflict potential exists to the extent that the actions of one party are likely to (or perceived to) hinder goal attainment of the other. The level of dependence (or power) that one party has with another is determined by the value of the inputs invested in the relationship. The level of power is inversely related to the level of dependence between the parties. Conflict perception has to do with one party's judgment of whether or not the other party is interfering with attainment of its goals. If one party perceives that a conflict exists between itself and the other party to the relationship, then conflict exists just as much as if there were an actual disagreement or dispute.
Resultant force, either coercive or noncoercive, is the pressure that one party uses to persuade the other to change its goals, objectives, and perceptions of reality in order to meet its own desires. Although coercive pressure frequently causes more disruption in the relationship than does noncoercive pressure, it is usually more effective in eliciting immediate changes in the behavior of the other party. As in Pondy's model, conflict aftermath, the outcome of the conflict resolution sets the stage for future interactions between the organizations. Several possible outcomes exist as a result of conflict aftermath:
- the party initiating the power gets what it wants,
- the relationship is terminated,
- the ratio of benefits and costs will change, altering the basic nature of the relationship, and
- power may actually shift from one party to the other.
Levels of Conflict Model. The basic Levels of Conflict Model (see Figure 1), which was adapted from Magrath and Hardy (1989) and Gaski (1984), proposes a three-level model of conflict:
- alpha-level conflict (performance-oriented),
- beta-level conflict (personnel/policy-oriented), and
- gamma-level conflict (structurally-oriented). (figure 1 is not available in this text-only version)
This model was developed following completion of an exploratory field study of a Midwestern OEM manufacturer and two of its key suppliers in 1994. The results of the field study indicated that there seemed to be a hierarchy of causes of conflict between buyers and suppliers in SLCRs and that buyers and suppliers tended to view the actual causes of any given conflict episode differently.
The three axes illustrated in the Levels of Conflict Model are:
- Intensity, and
Impact refers to the time orientation or lasting consequences of a conflict episode between buyer and supplier. The three levels of impact are described as:
- tactical, and
The operational level of conflict impact indicates that the effects of the conflict episode are primarily short-term, or day-to-day. The tactical level demonstrates that the effects of the conflict are longer lasting but would not create long-term negative consequences to the continuing effectiveness of the SLCR. The strategic impact of a conflict episode is long-term in nature with ongoing repercussions to the SLCR's status.
Intensity reflects the emotional content of the conflict episode. The three levels proposed here are:
- moderately intense, and
Conflicts of minor intensity are generally trivial disagreements that flare up and are quickly resolved or easily overlooked. Moderately intense conflict episodes reflect the fact that the conflict may become very intense at the moment but is also infrequent in nature or may not recur in the future. Conflicts displaying major intensity levels would be significant disputes that could linger and eventually lead to, at best, counterproductive behavior, or at worst, destructive behavior on the part of either the buyer or the supplier. Such dysfunctional behavior could result in such outcomes as active animosity, lawsuits, arbitration, or eventual termination of the relationship.
Importance is concerned with how vital the subject matter of the dispute is to the parties and is rated from low to high. Even though the emotional content, or intensity, of a conflict episode may be relatively high (moderately intense to major intensity), the actual subject matter of the dispute may be relatively unimportant and may not warrant any significant attention from the disputants, thereby mitigating the potentially negative impact of the conflict episode on the status of the SLCR. Conversely, if the importance to either or both parties is high because it represents a key goal or objective, the level of intensity would be higher than it might be otherwise.
Alpha-level conflict exists in the realm of day-to-day variation of short-term performance on the part of either the buyer or supplier. Examples of alpha-level conflict generated by a supplier could include:
- inconsistent deliveries,
- some variability in product quality,
- incorrect quantities shipped,
- wrong products delivered, and/or
- unauthorized product substitutions.
Examples of alpha-level conflict generated by a buyer might include:
- invoices not paid on time,
- changes in quantities ordered, and/or
- demanding frequent rush orders.
Beta-level conflict is temporally longer in nature than alpha-level conflict and can be characterized by moderate disruptions to or stresses placed on the buyer-supplier relationship which arise from such personnel or policy-oriented activities as:
- significant price increase requests from the supplier, or
- drastically reduced quantities ordered by the buyer.
Changes in key personnel by either organization, i.e., sales representatives, technical representatives, purchasing agents, managers, design engineers, or quality assurance personnel could result in beta-level conflict when uncertainty within the relationship significantly increases as a result of such changes. Also, if actual alpha-level conflicts are left unresolved to the satisfaction of both parties over time, then the impact, intensity, and importance of those alpha-level conflicts could escalate and become more beta-like resulting in higher costs and additional organizational stress.
The highest, or gamma-level, plane of conflict experienced in SLCRs can be epitomized as structural "shocks" to the SLCR, demonstrated by such long-term changes or shifts in:
- the nature of the product being procured,
- the nature of the final end product sold by the buyer,
- the process by which the procured item is manufactured or provided,
- any technology that affects either product or process,
- either firm's basic organizational structure, such as may be encountered in mergers and acquisitions or downsizing activities, and/or
- either firm's core competencies.
As was discussed above, gamma-level conflict can also be encountered through continuance of beta-level conflict that remains unresolved to the satisfaction of the parties. Gamma-level changes would typically generate a potentially severe upheaval to the structure or health of the SLCR by creating strong uncertainties and are likely to result in termination of the SLCR or, at a minimum, major modification of the cooperative relationship as opposed to the original intent of the parties. However, a significant "shock" to the SLCR may actually be beneficial to the relationship if both parties agree to work together to forge a new and stronger relationship and to develop a new set of common goals and objectives.
Conflict Feedback Model. The Conflict Feedback Model (see Figure 2) synthesizes Pondy's stages of conflict development model, Cadotte and Stern's process model of conflict, and the Levels of Conflict Model proposed in the author's dissertation research sponsored by the National Association of Purchasing Management. The new model identifies the process nature of conflict and takes into account the character or level of conflict, as well as the role of conflict aftermath in influencing future exchange activities of the parties. In the Conflict Feedback Model, conflict aftermath acts as a dynamic feedback mechanism which biases the parties' perceptions of future conflict episodes and their reactions of how to effectively manage such episodes to the full satisfaction of the parties. Combination of the factors on the three axes as identified by the Levels of Conflict Model, i.e., impact, intensity, and importance, indicates that any conflict episode can result in alpha-, beta-, or gamma-level conflict. (Figure 2 is not available in this text-only version.)
The Conflict Feedback Model also indicates that there are several moderating factors which will also influence how the conflict is perceived and resolved by the parties and include: 1) the conflict resolution techniques employed, 2) the inter- personal characteristics of the key representatives of the organizations involved, 3) the nature of the competitive marketplace, in terms of market demand, technology, competition, and overall economic conditions, 4) the external legal and political environment surrounding the dispute, and 5) the age or maturity of the SLCR.
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