Companies exist in a web of suppliers, partners and allies. How do these relationships affect success. Phin Upham discusses a seminal work in the field.
In Specialized Supplier Networks as a Source of Competitive Advantage: Evidence from the Auto Industry, Jeffrey Dyer presents a compelling and interesting case for the interrelation of inter-firm specificity and performance. Specifically, he studies the US and Japanese car industry and attempts to analyze the relationship between car suppliers and auto companies from the above perspective. Dryer is able to take one of the central insights of transaction cost economics and apply it to a reified and appropriate area, generating new and compelling insights. Further, his essay goes beyond merely describing a relationship between asset specificity and performance, it suggests deeper inter-cultural sociological issues regarding trust, in-imitable competitive advantage, and social structures that underlie business relationships.
Dyer introduces the notion that transactors may realize a competitive advantage not only through their own assets, but also through their interfirm specialization. This point becomes a theory of competitive advantage in another paper read this week, which is coauthored by Harbir. Dyer is illustrating that it is not only important that a firm be concerned with its own supply chain, but it ought to also pay attension to integrating its network of customers. There is a fundamental tension in the way the story of rents is told in Ricardian economics. Above average rents come from capabilities which are non-imitable and relatively exclusive. But the only reason these capabilities are valued is because someone else needs them, someone else is willing to pay you to get your services. This implies that they have a specialized need for this good. Thus, the more specialized the good the more a firm who is in dire need of that good will pay for it. But at the same time the more specialized the good, the lower the pool of customers is likely to be. So there is a tension between the size of your customer pool and the price you can extract from them. Dyer solves this tension by constructing a theory in which suppliers are hyper-specialized, potentially to a customer of one, but extract above average rents by cooperating and sharing profits with their customer, keeping both satisfied. As dyer says, and he borrows heavily from Williamson here, “the ability to employ specialized assets as a source of advantage is contingent on the costs associated with safeguarding those investments.”
Dyer compares US automobile company’s relationships with their suppliers with Japanese auto firms’ relationships with their suppliers. He proposes a positive relationship between “investments in interfirm asset specialization and the performance of the product network.” Williamson differentiates between three sorts of asset specificity, site, physical, and human asset. Dyer will test all three.
With asset specificity, Dyer hypothesizes that the greater the interfirm and human specificity, the fewer the defects in the product. This is justified by the logic that if a product is made according to specific standards and there is more consequences to shoddy work (accountability) the outcome will be better made. Secondly, Dyer argues that if two companies are in close contact and are committed to each other, it will be easier and more efficient to develop new products and to be able to product products specifically tailored to new innovations. So a tight relationship between a company and its suppliers will both allow implementation of innovation and more creative thinking about it (since the firm can execute and test its ideas). This idea, that production and innovation should be closely linked, has existed as an idea applied WITHIN firms for some time, but Dyer extends this to argue that interfirm advantages can result from this coupling as well. Thirdly, the closed the interfirm site specificity the lower inventory costs will be. Lastly, he concludes by arguing that the confluence of these specificities – site, physical, and human – will be positively correlated with the joint profitability of the transactors.
Dyer chose the Auto industry because the suppliers and the car manufacturers in this field are reciprocally independent. It is a large industry with complex production and part aspects which undergoes relatively consistent innovation. Further, it is a competitive industry where comparative advantage will be quickly noticeable if present. He included five firms, two Japanese (Nissan and Toyota) and three American (Ford, GM, and Chrysler) and a 50 member cross section of their suppliers (25 close, 25 not close). While one might wish for 1) a larger number of firms and 2) perhaps another country to help generalize, the limitations of the data and the depth with which Dyer delves into his studies makes this a powerful study with believable results. Dyer collected survey data from suppliers and car companies, receiving data from 192 of 250 suppliers. Interestingly, response rates were notably higher for Japanese suppliers than US suppliers.