Question

analyse the role of power and trust in the development of strategic buyer-seller relationships

Answer 1

The buyer-supplier relationship can be based on power or on trust. When it bases on power, either the buyer or the seller is more powerful than its counterpart. For the buyer, the source of power can come from high volume purchase, low switching cost, low differentiation in products, the ability for backward integration, and price sensitivity. On the other hand, seller's power generated from low fragmentation of its industry, differentiated supply (in terms of low price, high quality, and so on), low or nil substitutes for the buyer, and forward integration. However, when the relationship is based on power, the dyadic nature cannot be established or realized in a long-term basis because no partner wants to assume total dependence on its counterpart and that the superior partner may want to exploit its power advantage. A win-win negotiation or terms cannot be established using power on a sustainable basis and therefore, either the buyer or the supplier does not remain committed to the relationship over a long period of time. As a result, the inefficiencies and cost of the overall supply chain may increase.

When it comes to a trust-based relationship between buyer and seller, the concept is comparatively new and often inherited from the Asian firms to the world business in the age of globalization. Here the concept is to develop trust and relationship to realize a long-term dyadic nature of the interaction between the buyer and seller. A clear understanding of the Chinese cultural variables “guanxi” (personal relationships), “xinyong” (personal trust), and “renqing” (repaying of favors and showing empathy to partner involved in their business network) and the Japanese “keiretsu” (close business linkages) have been presented as important constructs for understanding and being able to conduct business in these countries (Leung et al. 2005). All these concepts are founded on the trust-based relationship between buyer and seller (or, the supplier). The advantage of such relationship is that the investment in maintaining such relationship reduces considerably over a period of time, the transaction cost gets minimized, and the overall supply chain becomes efficient.

Reference

Leung, K., et al. [2005], 'Culture and international business: recent advances and their implications for future research', Journal of International Business Studies, Vol. 36, pp. 357-78.