Nature of Buyer–Supplier Relationship: Small Businesses in a Small City

Abstract

If the proposition of Williamson that “highly standardized transactions are not apt to require a specialized governance structure” (1979, p. 248) is to be accepted, then a discrete transaction market between small business owners and their suppliers can be easily organized in the market. This view essentially nullifies the possibility of there being a relational transaction. In this backdrop, this research attempts to explore the small buyer–supplier relationship in the context of a small city. Keeping embeddedness (Granovetter, Am. J. Sociol., 1985; 91: 481–510) as a theoretical foundation, we explore the social content in an apparently pure economic exchange. Although, earlier attempts (Khoja and Kauffman, J. Small Bus. Manag., 2012; 50: 20–40; Uzzi, Am. Socio. Rev., 1996; 61: 674–698) conformed to embeddedness in transactions between a buyer and a supplier among businesses of various sizes, they largely ignored very small‐size buyers and suppliers owing to the miniscule size of business transactions and less frequent interactions between buyers and suppliers. Based on the grounded theory approach (Strauss and Corbin, Basics of Qualitative Research‐Grounded Theory Procedures and Techniques, 1990), in this study, we conducted in‐depth interviews with 57 very small business owners to develop detailed narratives. These narratives were organized under four themes: Contractual relationship, Strategic information sharing, Caste as a proxy, and Trust Factor. The findings clearly indicate that small business owners foster continued relationships with their suppliers, owing to social conditioning factors.

Notes

4. Khoja and Kauffman's sample consisted of manufacturing firms, whereas this study included manufacturing firms, retail and wholesale businesses as defined by National Industrial classification (NIC).Khoja and Kauffman had used perceptual data to measure their hypothesis. As we know, it is hard to obtain quantitative data on issues of this kind, and collection of perception‐based data becomes inevitable.

5. In India, the net small business growth in terms of annual mean growth rate of employment has been 16.1 percent (Liedholm and Mead 1999).

6. Theory of inter firm‐cooperation suggests that interactions between firms take place only through anonymous market transactions as per the principle of competition (You 1995).

7. He is the founder of Dvaita (dualistic) School of Philosophy and Religion. Accessed on http://dvaitavedanta.files.wordpress.com/2007/10/madhva_basics.pdf.

8. Classical economists view a “contract” as a system that is carefully worked out with all future contingencies in place, which provides the parties with a legal framework with court ordering as a solution for breach of contract. This group of thinkers discards the possibility of personal‐level resolution for any disagreements that may occur between parties in the course of business. To make this more progressive, neo‐classical economist introduced the possibility of mediation in the contracting. Later thinkers introduced the idea of relational contracting against classical and neo‐classical views (Barnett 1992; Macneil 1974‐as cited by Williamson 1985). As a further progression, Williamson in his series of works defines contract as a mixed product, both transactional and relational, depending on the degree of dimensions (frequency, uncertainty and asset specificity). In recent years, economic sociologists (mainly Granovetter and Uzzi) describe a contract as a system embedded in an ongoing interaction between people.

9. Franchise business included branded watch sales and services, telecommunication products, gas services, fertilizers and cement.

10. “[S]mall businesses are concerned that increasing commitment to particular suppliers may entail a greater degree of risk than they are willing to take” (Khoja and Kauffman 2012, p. 31). In other words, by perhaps fully entrusting their purchases of a particular commodity to one supplier, they become totally dependent on that supplier for continued supply of products.

11. Uzzi (1996) calls this embeddedness till the point of threshold. Too much of embeddedness beyond the point of threshold in the network or relationship may curtail exposure to anything that lies beyond the network.

12. Quite a significant number of supplier–buyer relationships have been found to have a high level of trust and informal commitment (Mudambi and Helper 1998).

13. As noted by Mehta, HalariOswal Jains in East Africa built a strong network of business communities from their own caste, implying a sharing and exchange of resources for each other's needs (Mehta 2001).

14. Exchange of quality information is possible only under circumstances wherein a buyer's perceived trust is high. Although in the opposite circumstances, as findings in a recent study reveals, “under lower trust circumstances, information exchange does not provide significant enhancements to performance…. In all likelihood, under low trust circumstances, information generated through information exchange has less credibility and therefore may have little impact on behaviour” (Gundlach and Cannon 2010, p. 412). Therefore, a high degree of trust becomes the cornerstone.

15. Complications may include issues such as the quality of the product and timely delivery.

16. This is because speaking in quite economic terms “a firm can save time and opportunity costs by establishing supplier relationships with the future in mind” (Beekman and Robinson 2004, p. 72).