An innovation systems approach - Wiley Online Library

Strat. Change 21: 263–274 (2012) Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/jsc.1908

RESEARCH ARTICLE

Customer-Supplier Relationships During the Process of Innovation: An Innovation Systems Approach1 Wendy Phillips Bristol Business School, University of the West of England, Bristol, UK

Richard Lamming University of Manchester Business School, Manchester, UK

Nigel Caldwell Logistics Research Centre, School of Management and Languages, Heriot-Watt University, UK

For the purpose of innovation in hi-tech customer–supplier relationships, some institutions such as openbook negotiation have failed to adapt to the changing nature of product and process technologies and the innovation required to address them. Within supply relationships, past history strongly determines the rate and nature of technological development. It may also be that the wealth of experience and understanding that develops between the two parties entraps customers within a relationship.

W

ithin an innovation system, institutions may contain the ability not only to support but also to restrain the coordination of knowledge and

skills in inter-organizational relationships.

Introduction As Ford et al. (1998:270) recognized, viewing one particular characteristic of relationships, such as technological development, provides a unique but not holistic view of a network or industrial system. A different view of the network or system might emerge if, for example, logistical flows were the focus of analysis. Adopting an innovation systems approach, this article examines how institutions in supply markets may be hindering rather than supporting inter-firm relationships in supply networks. As product and process technologies become more dynamic and complex, firms must access knowledge and skills that lie beyond their core capabilities. This access is critically dependent upon positive exchanges of knowledge and information amongst agents (Smart et al., 2007). In practice, however, issues such as trust, intellectual property ownership, the absence of formal agreements, cultural differences, and opportunistic behavior all serve to hinder this process, inhibiting the flow of knowledge and preventing the exchange and development of capabilities amongst organizations (Rolfstam et al., 2011). Intensification of supply chain and network linkages has resulted in increasing dependence between customers and suppliers for the supply of information and 1

JEL classification codes: D02, O31, O32.

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Strategic Change DOI: 10.1002/jsc.1908

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Wendy Phillips, Richard Lamming, and Nigel Caldwell

expertise (Coombs et al., 2003; Lamming et al., 2006). Consequently, there is growing recognition of the importance of developing cooperative inter-firm relationships that promote the diffusion of knowledge without the restraining effects of social liability. Building on this, the article aims to consider the nature of the interactions, exchanges, and boundaries that may exist between customers and suppliers. The research focus in this article develops from the customer–supplier dyad to look at the system of innovation within which dyads operate. The article draws on the research findings of an EPSRC-funded action research project investigating the sharing of information and knowledge for the purpose of innovation in customer–supplier relationships. The project involved close collaboration with practitioners from four UK hi-tech companies. The researchers were granted access to study closely these companies’ interactions with their suppliers, resulting in nine case studies comprised of the four industrial collaborators and 17 of their supplier organizations. The article will present the outcomes of our findings as they relate to innovation systems. In discussing how traditional concepts regarding supply relationships may not adequately address the problems and issues inherent to current buyer–supplier practices, we will challenge the classical hierarchical models of buyer– supplier relationships. Following a review of the literature, we will consider the construct of customer–supplier relationships. We will go on to provide an overview of our research methodology and then support our argument through our empirical findings before delivering our conclusions.

Literature review Systems of innovation approach As product and process technologies become increasingly dynamic, complex, and diverse, they present challenges (for example, in product design and system implementation) that lie beyond the firm’s internal capabilities (Tidd

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and Bessant, 2009). Consequently, it is necessary for firms to access an array of capabilities that lie beyond the boundaries of the firm. Addressing this imperative results in an innovation process that Coombs and Metcalfe (2002) refer to as collective and combinatorial in character. In this environment, a firm’s external relationships may be seen as gateways to other knowledge bases or ‘selection environments’ (Nelson and Winter, 1982). One of the drivers, therefore, in the observed behavior in firms toward adopting collaborative approaches in supply management may be presumed to be the need to address the technological developments, or as Rosenberg (1982:107) calls it, the ‘technological imperative.’ Observation of collaboration and cooperation such as this reinforces the view that firms do not operate in isolation but within a wider network or system. The importance of such linkages is recognized and explored by the literature relating to ‘systems of innovation.’ Many studies have been carried out since Lundvall first introduced the systems of innovation approach in the 1980s (Lundvall, 1988), resulting in an array of perspectives, including: national systems of innovation (NSI) (Freeman, 1988; Lundvall, 1988; Nelson, 1993); technological systems (Carlsson and Stanckiewicz, 1991; De Liso and Metcalfe, 1996); and sectoral innovation systems (SIS) (Pavitt, 1984; Scherer, 1986). The standard interpretation of NSI is a ‘set of organisations, institutions and linkages for the generation, diffusion and application of scientific knowledge operating in a specific country’ (Galli and Teubel, 1997:345). However, the concept of a national system of innovation has been brought into doubt as business activity, capital, and technological change have become more global in nature, and accordingly researchers have increasingly focused on technological systems. Technological systems move beyond the boundaries associated with a nation state, focusing on the exchange of knowledge and information with respect to a particular economic or industrial area. According to Carlsson and Stanckiewicz (1991:111), technological systems may be defined as a:

Strategic Change DOI: 10.1002/jsc

Customer–Supplier Relationships: An Innovation Systems Approach

network of agents working and interacting in a specific economic/industrial area under a specific institutional infrastructure to generate, diffuse, and utilise technology. Technological systems are defined in terms of knowledge competence flows rather than flows of ordinary goods and services. They consist of dynamic knowledge and competence networks. Such competence building underlines the importance of interactive learning. Interactive learning is intrinsic to the systems of innovation approaches, not only in terms of the dynamic of the system, but also as a means of holding the whole system together (Archibugi et al., 1999). The process of interactive learning occurs not only through market exchanges between firms but also through market exchanges between the firm and consumers. In addition, it develops through the gradual diffusion of new technological knowledge throughout the technological system and through the non-market learning activities. Such learning may simply be the exchange of knowledge (including tacit knowledge) or it may be a coordinated process between firms. Thus, although each firm may have its own set of firm-specific capabilities, it must not be assumed that these capabilities are acquired through an independent learning process within the firm. Coombs and Metcalfe (2002) use the term ‘cross-firm capabilities’ and this indeed may be more appropriate when considering the complex nature of today’s technological innovations. A technological system can be viewed as a set of interrelated subsystems that may act independently but, by means of interactive learning, contribute as a whole to the development of a technology. However, the various subsystems may not act in synchrony and, as Hughes (1992) notes, some components of the same system may progress more efficiently than others. These subsystems may actually dictate the rate of development for the whole system, possibly creating the development potential for the rest. Despite this development potential, however, the rate at which the system progresses may still be limited by subsystems that are less advanced. Hughes (1992) refers to


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components (or subsystems) that trail behind the rest as ‘reverse salients.’ If the system is to advance, these components must be improved. When this cannot be achieved, a radical solution may be adopted using ideas and principles from another subsystem. De Liso and Metcalfe (1996) describe the structural tensions that build up within a system in terms of imbalances, linkages, and constraints. While there must be some degree of compatibility (linkage) within each system, subsystems will be following their own design configurations (technological paradigms). Systems may enable interactive learning but they may also create ‘interrelatedness constraints’ (De Liso and Metcalfe, 1996:88) on what may be achieved. In other words, subsystems may develop at different rates and an improvement within one subsystem may diffuse throughout the rest of the system only if it is economically feasible for all members of the system to remain compatible. Imbalances may result from various factors, such as changes in the social and economic environment or incentive structures and externalities in technological development. Leoncini (1998) perceives the nature of the relationship that exists between the firms, the interface, as being the salient issue. Where a strongly compatible interface or relationship exists, co-evolution of the subsystems may be expected to occur. As the degree of compatibility decreases, the influence that the subsystems have on each other becomes less marked until a situation may arise where they are completely disjointed. Consequently, the degree of compatibility between the subsystems will strongly determine the nature and rate of technological development of the system. The role of institutions Central to the systems of innovation approach is the role of institutions. The term ‘institution’ is commonly applied to a rigid component or establishment with a strict set of rules. We use it here in the sense propounded by institutional economics to include disembodied routines, conventions, and customs:


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Institutions are the humanly devised constraints that structure political, economic, and social interactions. They consist of both informal constraints (sanctions, taboos, customs traditions and codes of conduct), and formal rules (constitutions, laws, property rights). (North, 1991:97) This suggests that an institution can act in one of two ways; either as a governing body through, for example, welldefined policies and law, or less formally, along a set of behavioral norms such as routines and culture. In line with this view, Coriat and Weinstein (2002) distinguish between Type 1 and Type 2 institutions. The former type ‘is based on the criteria of authority and enforcement and posed on all the agents’ (Coriat and Weinstein, 2002:283). These are typically formal laws that apply to everyone and cannot be waived (Coriat and Weinstein, 2002:282), i.e., institutions that traditionally have been emphasized in the innovation literature. Type 1 institutions also include an enforcement system that punishes any violation of the institutions. Type 2 institutions are the rules that individual agents decide to give themselves; they are ‘ “private” collective agreements between groups of agents’ (Coriat and Weinstein, 2002:283). Building on these studies, it can be suggested that institutions may operate on different levels and be implemented informally (Edquist et al., 2000; Nyholm et al., 2001). Work conducted by Rolfstam (2009) highlights the need to take other institutional levels into account and in this article we suggest that there is a need to go beyond a focus on formal institutions and look at the role informal constraints have in influencing the innovation process between firms. However, while providing the stability, coordination, and incentives to innovate, institutions may also act as a brake. For example, lack of incentives for a new technology may eventually lead to a situation whereby society is ‘locked in’ to the ‘wrong’ technological system (Ackermann, 1998). Consequently, just as firms rely on institutions, those same institutions are dependent upon firms to keep them up-to-date with technical advances; in other words, they co-evolve. It is naturally possible for some


firms to be ahead of their competitors in this institutional evolution. Since, in supply chain relationships, compliance or use of an institution requires two parties (customer and supplier), the notion arises of a dyad, rather than a firm, being ahead in this manner, implying a differential dyadic competence. The nature of the relationship between organizations and institutions may be characterized as game playing, the institutions acting as the rules that govern the game and the organizations the players. By pushing against the barriers, or rules, the organizations are the agents of institutional change. Where the game concerns the development of a technology, the firms are initially reliant upon the institutions not only for stability but also for the coordination and reproduction of knowledge. This is particularly apparent during the early phases of technological development or with technologies that have an ever-changing knowledge base (Metcalfe, 1995). However, as a technology develops there is a shift in balance. Organizations may remain dependent upon an institution for the efficient distribution of knowledge but, as they become familiar with the technology, knowledge accumulates and the institution begins to depend upon the organizations to keep it up-to-date (with the ‘state of play’). In extremis, a lack of feedback may result in what Johnson (1981) calls ‘rigidity’ or ‘institutional sclerosis’ within the system. Customer–supplier relationships and the process of innovation It has long been recognized that the interaction between users and suppliers promotes innovation and technological development (Teece, 1986; Lamming, 1993:230; Gadde and Håkansson, 1994:34). With respect to technology and innovation, an understanding of the concept of institutions must be developed in studies of supply relationships. This is particularly important if we wish to go beyond the discussion of price to include the processes of interaction and communication. In analyzing the ‘distributedness’ of provision and innovation, Coombs et al. (2003) highlight the need to



understand the relationships between agents. This is supported by Lundvall (1988), who in eschewing the neoclassical view of perfect competition suggests that the exchange of information between buyers and suppliers goes beyond price signals to include ‘flows of qualitative information and direct co-operation.’ Such relationships might be hierarchical but without ‘mutual trust and mutually respected codes of behaviour’ (Lundvall, 1988:352) will turn out to be unsatisfactory on account of the uncertainty inherent in embarking on a supplier relationship. Supply hierarchies where a dominant player (usually the customer) employs a position of power have developed through the practices and routines inherent to the management of customer–supplier relationships. Over the years a number of approaches have been developed based on the premise that only the supplier has a truly holistic view of the supply system and is thus qualified to adopt the lead role. Popular approaches include supplier assessment, supplier development, and open-book negotiation. Open-book is the practice observed in customers requiring their suppliers to reveal operating details that would normally be kept secret for commercial purposes (Lamming et al., 2005). The justification usually offered for such intrusion is the customer’s assumed ability to judge the supplier at the micro-level and, possibly, to suggest ways of improving cost performance. The practice is flawed in its assumption of generating sound operating data since the supplier, faced with a carte blanche ultimatum (in some sectors, open-book has become a prerequisite for tendering), runs the risk of sensitive data being exposed to competitors (i.e., via the customer). Thus the supplier must hedge the risk by corrupting the information. Far from the simple opportunism of transaction cost economics, such corruption, or ‘cheating,’ is in fact a necessary practice for the supplier to avoid loss of competitive advantage. Customers realize this and tolerate the corruption, presumably resorting to idiosyncratic interpretation (frequently mathematically based) in order to use the data for purposes of assessment.


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Practices such as open-book negotiation have become stylized and formalized in many sectors and are assumed to be a reasonable approach to gaining management information at the interface, for the customer’s use (and benefit). Consequently, it appears appropriate to suggest that these supply practices may be classified as institutions, employed as the means of reducing the risk that the customer faces when developing a relationship with a supplier. As noted above, institutions may develop more slowly than the organizations to which they relate, creating discontinuities in the business model. It may be the case that such institutions lag behind the needs of their practitioners. Institutions are meant, inter alia, to help the firms they impact upon to manage and/or adopt new approaches that promote knowledge flows and communication. Current practices appear to be failing in this, actually leading or contributing to institutional sclerosis in some sectors. As it stands, institutions such as open-book negotiation appear to restrict knowledge flows because of the inherent corruption (cheating). The inability to meet the need for improved communication and knowledge flow acts, therefore, as an imbalance within the innovation system, constraining development. With respect to relationships within supply networks, overcoming this constraint may require the removal or radical evolution of failing institutions. This may then promote the development of practice that is more in keeping with the factors faced by firms, such as the rate of technological change (and the commercial pressures for early adoption) and emergence of new concepts. According to Coriat and Weinstein (2002:279) the institutional framework defines the ‘social positions and functions of individuals and groups and constrains their actions.’ In our empirical study we have looked at how existing institutional arrangements within supply relationships, in the sense propounded by North (1990), have affected the development of cooperative relationships between customers and suppliers and the consequential implications this has for the process of innovation.


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Material and methods Each of the four sponsor companies nominated between one and three case studies. The resulting eight case studies involved 17 supplier companies, from both dyads and supply networks. The size of the nominated firms ranged from very small to multinationals. The 39 interviewees consisted of managers from both the customer and supplier companies, from a range of technical and commercial functions. In many cases, the choice of interviewees was determined by firm size; in SMEs many managers would straddle both commercial and technical functions. Interviews were executed at the firms’ sites and secondary data was supplicated. The interviews were open-ended and acted both as a ‘warm-up’ procedure and a means of providing the researchers with an insight into each of the case study relationships. It is important to emphasize that during the interviews, discussions were centered around relationships on a general, not specific, level. Consequently, any references to ‘customers’ or ‘suppliers’ are not necessarily directed toward the case companies. The data was subjected to qualitative analysis through the deployment of NVivo. NVivo is a qualitative software package that supports analysis across a wide range of qualitative fields and methodologies. Although many qualitative research methods exist, each with its own special attributes, they do have certain common themes: all require the researcher to tread sensitively and without preconceptions or previous quantification; throughout the data is collected in the form of study, field notes, annotations, or models. When using NVivo, data is collected into two main data systems: the document system and the node system. The document system acts as a project manager, organizing all compound text, such as draft proposals, interview transcripts, and bibliographies, supporting the linkage, integration, and exploration of data. All concepts, themes, and topics associated with the research are categorized through the node system. Here, documents are coded or multi-coded when any specific


topics arise in the compound text or ‘documents.’ There are four types of node: ‘free nodes,’ ‘tree nodes,’ ‘case,’ and ‘case type’ nodes and these enable both structured and unstructured representation of the topics. Through the use of node categories, concepts and ideas are developed that may eventually lead to the formation of grounded theories. Topics or ideas that cannot be readily grouped become free nodes; those that can become tree nodes. In the case of this project, discussions between the research team and the sponsor companies contributed toward the selection of nodes, revealing ideas, topics, and concepts that were felt to be of particular relevance to the research. This ensured that all the material that had arisen through literature reviews, previous conceptual workings, and the managers’ insights and perceptions was fully integrated into the data analysis.

Results and discussion For the purpose of this article, the focus was on the institutional aspects of customer–supplier relationships in relation to their influence on the development of cooperative relationships and the process of innovation. It became apparent that there were common issues to each of the cases studied, which may therefore be endemic to supply relations as a whole. These issues were: 1. 2. 3. 4.

institutional embeddedness barriers to communication negative legacy value.

We consider that these issues have arisen as a result of, or in response to, the institutional framework that currently exists within supply relationships. The following sections summarize the main emergent issues. Institutional embeddedness Traditional practices and routines defined the nature of exchange amongst parties. These were not limited to the buyer–supplier interface but existed throughout the relationship as a whole. Such traditions or routines made it



difficult for the firms to shift toward more cooperative ways of working, despite the fact that all those interviewed recognized cooperation as fundamental to developing effective supply relations. This extended across the majority of functions, from design to testing. For instance in the customer firms, the design process rarely involved input from the suppliers despite their wealth of knowledge and experience in a specific field and often this seemed to be purely out of habit rather than reason. In one case company, the testing procedures clearly restrained innovation within supplier firms; the customer discouraged the suppliers from innovating on account of the time and cost implications of validating any changes to existing products or processes. Such testing slowed one firm’s move toward e-auctions, the substantial cost savings made through sourcing via e-auctions being diminished or delayed by the resources required to validate any new suppliers or products or processes. Such institutional embeddedness serves to constrain technological development, acting as a brake on the pace of change, and fails to encourage either party to move toward more innovative ways of working. Several of the interviewees acknowledged they were so deeply entrenched in their routines and processes that any moves toward more cooperative ways of working would be difficult to achieve. As might be expected, institutional embeddedness appears to be more prevalent in the customer firms, the size and range of functions making it difficult to adapt quickly and effectively. This appears to be reinforced by the high rate of staff turnover within the customer firms. Inexperienced personnel launched into new positions would revert to old tried and practiced ways of working rather than risking new approaches, thus perpetuating old styles of working and contributing to institutional embeddedness. This appeared to be common to procurement functions, where the lack of professionalism was an additional problem; it appeared that buyers without the necessary skills and knowledge tended to adopt power-based approaches that oppose any moves toward more challenging, closer collaboration between customers and suppliers.


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Barriers to communication Communication presented itself as the biggest problem in supply relationships. It became apparent that both customers and suppliers are willing to embark in game playing, particularly as a retaliation mechanism when either party felt it had been treated unfairly or in an unjust manner. Some suppliers openly admitted to buying time and space by telling the customer what they wanted to hear rather than what they should hear. In some cases, this was as a result of a specific job not being done, but more often it was due to a crisis arising from the supplier’s fear of drawing the customer’s attention to problems; the fear might relate to losing business or damaging their reputation. In situations where the supplier felt that the customer was taking the wrong approach or doing something incorrectly, they tended to keep quiet. According to suppliers, this was because of customers’ unwillingness to listen to or take advice from suppliers despite their experience and knowledge. Some suggested it could also be attributed to a lack of awareness of the suppliers’ capabilities. As a result, suppliers would let a project advance and wait for problems to arise as, they reasoned, it was only through learning through failure that customers would acknowledge such problems, despite the potential impact on the final cost. Organizational structure, particularly firm hierarchies, appeared to have a strong influence on communication both within and between firms. Within large firms, it was often a case of decisions not filtering down the ‘ranks to the frontline.’ Consequently, buyers were often ignorant of, or late in hearing about, the latest initiatives and in some instances would hear via the supplier before being informed by their own firm. Most communication flows between customers and suppliers regarding the supply relationship appeared to be taken at the top level and either failed, or took some time, to filter down through the organization. Further complications would arise with the introduction of new supply team managers within the customer firms. Not only did this disrupt the continuity of the relationship, but new supply team managers, keen to make their mark, would make radical changes that


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tended to upset the rapport that existed at the interface. This was exacerbated by the high turnover of buyers, which disrupted the continuity of the relationship. Suppliers frequently reminisced about ‘the old days’ when negotiations were conducted over a working lunch or on the golf course. Such interactions were believed to contribute to the development of personal relationships between the buyer and the supplier. This not only made it easier to discuss problems or difficulties within a project and/or the relationship, but also provided each party with an insight into the other’s company, promoting a rapport and understanding of each other’s business. The increased use of and reliance on IT was seen as contributing to the breakdown of personal relationships and most suppliers were in favor of increased personal contact, taking upon themselves the responsibility for rebuilding the rapport. However, many interviewees emphasized that such contact could not simply be at a time of crisis, as was currently the case in most relationships, but was also necessary when things were going smoothly. On a technical level, communication was not a significant issue; knowledge and information appeared to be shared relatively openly and freely, especially when problems arose, requiring both parties to interact closely in the pursuit of a solution. This was in stark contrast to the commercial personnel, where knowledge openness was rarely seen. When technical or quality issues arose that might delay delivery, buyers would fail to become involved. This could be attributed to buyers’ unwillingness to become too close to a supplier, fearing that this might weaken their negotiating power. However, many suppliers mentioned a move by customer firms away from employing buyers with technical backgrounds. This, they considered, jeopardized the relationships: today’s buyers lacked the ability to be reasonable or rational when confronted with, for example, technical delays, as they were unable to appreciate such problems fully, expecting them to be fixed ‘here and now’ so that targets and deadlines could be met. Such lack of empathy often initiated the game playing. An exception: a technical director felt that increased professionalization of


the purchasing community was starting to have a positive impact on supply relations. It was clear that suppliers generally felt that buyers did not have the vocabulary necessary for discussing quality or technical issues. Such barriers to communication were a major source of frustration for suppliers, but also explain why technical personnel within a supply relationship share knowledge more freely: it is simply that they can. Also, technical personnel are more interested in investigating technological issues than commercial constraints and will enthusiastically discuss and share relevant information when appropriate. Generally, suppliers were willing to share knowledge with their customers, particularly if it provided them with an opportunity to display their full range of technological capabilities. However, many customers appeared to be unaware of their suppliers’ capabilities. Whether this was through ignorance or arrogance has yet to be determined. Despite the suppliers’ enthusiasm to provide a knowledge input into projects, such offers were rarely taken up by the customer firms despite the missed opportunity of an insight into non-standard processes. An unwillingness to relinquish control appears to be the customers’ overriding reason. By allowing suppliers to make an input into, for instance, the design process, customers reduce their overall control of a project. It seems that an underlying fear of letting go may be one of the reasons why customers are finding it difficult to pursue more cooperative ways of working with their supplier firms. Negative legacy History appeared to determine the manner by which technology was managed in supply relations in both positive and negative senses. For instance, over time the parties involved in a supply relationship had developed an understanding of each other’s ways of working, particularly at a technical level. This resulted in a high degree of tacit understanding that would be very difficult to establish or replicate elsewhere. This has advantages in the respect that all parties had learnt and witnessed together prior mistakes and successes



and over time had developed a pool of shared knowledge. Personal relationships had grown, making it easier, for instance, to contact relevant individuals within an organization. In nearly all cases, experience was quoted as a valuable asset and frequently cited by buyers as a reason not to source a product or service elsewhere. For suppliers, history also brought with it several disadvantages. Customers were quicker to remember past failures than they were to remember successes and this, suppliers feared, was held against them long after the event even if it had been a one-off. Furthermore, customers often found it difficult to perceive suppliers in an alternative light. Despite efforts by suppliers to be more proactive technically, they would frequently feel their efforts were not being recognized, their history forever determining their future. It became apparent that suppliers were particularly susceptible to ‘pigeonholing’ by their customers, the customers being unaware of, or blind to, the fact that suppliers were technically competent in other areas. In long-term relationships particularly, suppliers were known for the overall service that they had been delivering to the customer and it was very difficult to move away from such labeling, thus discouraging suppliers from considering developing alternative products or processes since such efforts would go unnoticed. Finally, it appeared that customers and suppliers entwined in difficult relationships found it hard to adopt or alter their approaches to one another. History appeared to dictate how each party would interact with another to a point where it was part of each firm’s culture. We concluded that no matter how positive a relationship might appear, there would always be negative factors in the memory that would emerge when conditions were difficult. This negative legacy would always militate against collaboration and therefore represented a brake to be removed for joint innovation. To adopt more cooperative ways of working would require all members of the firm to alter their perceptions and preconceptions of the other firm if the negative legacy were to be forgotten or overcome.


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Value The issue of value highlighted the difficulties in identifying the nature and level of value inherent to firms and to the relationship. More often, suppliers perceived personal and social relationships as a value and this was rarely mentioned by the customer firms. This could indicate an unwillingness in buyers to become too friendly (risking adopting a position of weakness, becoming subjective rather than objective in their approach, etc.) or a genuine (perhaps professional) coldness. The difference in each party’s expectations of the relationship became apparent with respect to value. It seemed neither party actually knew whether the value they were offering was the value wanted by the other party, and in some cases there were mismatches in this area. Furthermore, although both parties perceived long relationships as of value in terms of a deeper understanding of each other’s ways of working, they did appear to have perceived disadvantages. Suppliers frequently believed the constant cost-down approach adopted by many buyers undermined value in other areas of the relationship. Customers seemed aware of this but felt that they always considered this during the decision-making process. The suppliers’ perception of this issue may be more grave due to the fact that they are frequently not included in this decision-making process

Conclusion In their roles as institutions supporting the commercial and technical survival of firms in supply networks, sales and purchasing must adapt to reflect the changing nature of product and process technologies. The supply relationship is increasingly acknowledged as a critical means of supporting this adaptation and firms may be expected to develop more cooperative relationships in an attempt to expand their existing knowledge and skills base. Institutions such as open-book negotiation are apparently viewed as a valid approach to the more immediate pressures on firms (e.g., costs) and appear to be widely practiced in some sectors (including the manufacturing sector). In its current state, however, we suggest that these


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institutions have failed to adapt to the character of these more cooperative relationships, instead promoting a power-based structure that does not support the efficient transfer of knowledge and information between parties or the realization of value within the relationships. The rate at which they may evolve or be replaced by some more appropriate institution is uncertain. As Edquist and Johnson (1997) point out, institutions may continue to survive even after they have no function or fail to serve anybody’s interests — although in time they will fade away or adopt a new role. If the processes of industrial buying and selling have become routinized, it may be that to operate effectively, firms within supply dyads must develop new organizational skills and resources that help to manage the processes more effectively. With its focus on the development of cooperative supply relationships, this article has identified a number of issues that were common to the cases studied and that may have major implications for the process of innovation. It appears that within supply relationships past history strongly determines the rate and nature of technological development, the rigidity of the customer– supplier relationship making it difficult for both suppliers and customers to change the direction of technological development. It may also be that the wealth of experience and understanding that develops between the two parties entraps customers within a relationship. Despite recognition of the need for more cooperative relationships, institutional embeddedness, in terms of entrenchment in outdated and ineffectual routines and practices, is acting as a barrier to more innovative approaches. This is not restricted to procurement and is endemic across functions. If a shift is to be made, it needs to be adopted and accepted across an organization if benefits are to be accrued. The cases appear to confirm the original premise that supply interfaces contain inefficiency in the process of information and knowledge transfer, associated with standpoints and protection mechanisms. It also appears that potential value within the relationship remains locked away by these inefficiencies. Successful cooperation and com-


munication between customers and suppliers will require knowledge openness that is reciprocal and based on the mutual benefits that may be attained. Traditional hierarchical approaches will only serve to degrade the process. We do not advise the free exchange of knowledge and information between parties in a cooperative relationship. Rather, we suggest that knowledge and information should be shared on a justified and selective basis where the mutual benefits, expectations, and objectives are identified by all parties. Finally, any exchanges should be tailored in accordance with the nature of the supply relationship, ensuring that inherent cultural and historical idiosyncrasies are not overlooked. References Ackermann R. 1998. Institutional path dependence, history and reform. Paper presented at the 10th EAEPE Conference, Lisbon, November 5–8, 1998. Archibugi D, Howells J, Michie J. 1999. Innovation systems in a global economy. Technology Analysis and Strategic Management 11(4): 527–540. Carlsson B, Stankiewicz R. 1991. On the nature, function, and composition of technological systems. Journal of Evolutionary Economics 1(2): 93–118. Coombs R, Metcalfe JS. 2002. Innovation in pharmaceuticals: perspectives on the co-ordination, combination and creation of capabilities. Technology Analysis and Strategic Management 14(3): 261–271. Coombs R, Harvey M, Tether BS. 2003. Analysing distributed processes of provision and innovation. Industrial and Corporate Change 12(6): 1125–1215. Coriat B, Weinstein O. 2002. Organizations, firms and institutions in the generation of innovation. Research Policy 31: 273–290. De Liso N, Metcalfe JS. 1996. On technological systems and technological paradigms. In Hemstädter E, Perlman M (eds), Behavioural Norms, Technological Progress, and Economic Dynamics. University of Michigan Press: Ann Arbor, MI; pp. 71–95. Edquist C, Johnson B. 1997. Institutions and organizations in systems of innovation. In Edquist C (ed.), Systems of



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BIOGRAPHICAL NOTES

Wendy Phillips is an Associate Professor at Bristol Business School, University of the West of England. Her research interests focus on the management of innovation, particularly the systems of innovation approach and the public procurement of innovation. Prior to her current position, she worked at the Centre for Research in Strategic Purchasing and Supply (CRiSPS) at the University of Bath School of Management where worked on a range of projects with an innovation focus. She has published numerous articles relating to purchasing and supply and innovation in quality peer-reviewed journals and conferences and was on the UK Health Care Industries Task Force (HITF) Procurement Processes Steering Group, which brought together government and industry leaders to identify steps to develop and stimulate innovation in the UK healthcare sector.

Richard Lamming has focused on purchasing, supplier relationships and supply chain management throughout his working life. From 1986-90 he was a senior researcher on the International Motor Vehicle Program, based at Massachusetts Institute of Technology (USA) and SPRU in the UK; the research programme that developed the concept of lean manufacturing. Professor Lamming published principles of lean supply in 1993. In 1990, he was appointed as the UK’s first Professor of Purchasing and Supply Management at the School of Management, the University of Bath. He founded the Centre for Research in Strategic Purchasing and Supply (CRiSPS). For eight years he was Director/ Dean of two Business/Management schools in the UK (at the Universities of Southampton and Exeter) before returning full-time to his subject as a Visiting Professor at Manchester Business School in the UK.

Correspondence to: Wendy Phillips Bristol Business School Frenchay Campus Coldhabour Lane Bristol, BS16 1QY UK e-mail: [email protected]

Nigel Caldwell is a senior lecturer at the Logistics Research Centre, Heriot Watt University. His industrial experience was with Rover cars, then via an MBA to a PhD at Bath University. As well as publishing in academic journals, he has produced the book Procuring Complex Performance.

