On the benefits and risks of focused commitment to suppliers

Abstract

This paper discusses the merits of purchasing firms of pursuing a focused commitment strategy (FCS) with suppliers. An FCS involves committing long-term investments with a limited number of suppliers to achieve superior performance. Drawing upon transaction cost theory, agency theory and the knowledge-based view, a basis is provided for comparisons of the benefits and risks of such a strategy. Using data gathered from 224 US manufacturing firms, support for the hypothesized trade-offs associated with an FCS is examined. The findings support such trade-offs, suggesting that operational benefits accrue from increasing levels of focused commitment beyond unfocused levels — but only up to a point. The results indicate that firms pursuing above-average levels of focused commitment may be subject to risks that offset transactional and scale-related benefits. Detriments from too much focused commitment erode the firm's manufacturing-based competitive performance. In addition, the evidence indicates that profitability and market share growth also suffer. The paper discusses the implications of these findings for managers and for future research.

Keywords:

• Focused committment strategy
• Buyer-supplier relationships
• Supply management