(10) Strategic Management of SupplierÔÇômanufacturer Relations in New Product Development

Research Policy 31 (2002) 159–182

Strategic management of supplier–manufacturer relationsin new product development

Maurizio Sobreroa,∗, Edward B. Robertsb,1

a Department of Management, University of Bologna, Piazza Scaravilli 2, 40125 Bologna, Italyb Alfred P. Sloan School of Management, Massachusetts Institute of Technology, E52-535, 50 Memorial Drive, Cambridge, MA 02139, USA

Received 7 August 2000; received in revised form 6 November 2000; accepted 1 December 2000

Abstract

This paper discusses the role of contractual and organizational arrangements for the governance of supplier–manufacturerrelationships in new product development projects. We present cross-sectional project level data from 50 manufacturer–supplierrelations in new product development in the European Major Home Appliance industry using a single dyadic interaction asthe unit of analysis, to combine institutional decisions driving the governance of inter-firm relations and their organizationalimplementation. Our results show that (a) relational outcome depends on the type of joint activities, (b) it can be decomposedinto short term (efficiency) and long term (learning) effects, (c) less articulate types of joint development activities increaseefficiency, while more articulate joint development activities increase partner’s learning, and (d) inter-organizational struc-turing decisions are significant explanatory variables to understand relational outcome. Implications for the organization ofvertical collaboration in new product development projects are derived focusing on the emerging trade-off between short andlong term objectives as a central issue in guiding relational strategies. © 2002 Elsevier Science B.V. All rights reserved.

Keywords:Innovation; Inter-organizational relationship; New product development; Supply chain management

1. Introduction

The attention paid to inter-firm relations hasbeen constantly increasing during the past 15 years.Research has in turn emphasized the strategic appro-priateness (Roberts and Berry, 1985; Porter and BadenFuller, 1987; Harrigan, 1988; Lorenzoni and Baden-Fuller, 1995), the economic advantages (Williamson,1979; Contractor and Lorange, 1988; Kogut, 1988),and the learning implications of inter-organizational

∗ Corresponding author. Tel.:+39-051-2098076;fax: +39-051-2098074.E-mail addresses:[email protected] (M. Sobrero),[email protected] (E.B. Roberts).

1 Tel.: +1-617-253-4934; fax:+1-617-253-2660.

relations (Hamel, 1991; Kogut and Zander, 1992;Gulati, 1998). The central argument of this growingliterature is that individual organizations can no longerrely on their own resources to compete in today’sworld. Rather, they should look for strategic interac-tions allowing them effectively to leverage internalresources by investing in some core competencies andcontracting out other knowledge domains.

The analysis of innovation development processesis frequently pointed out as a prototypical example forthe need to rethink organizational boundaries (Aroraand Gambardella, 1991; Freeman, 1991). The speedof technological progress, the increasing amount ofresources needed to control fully the process and theshortening times for investment recovery are commonphenomena in many industries. Changes in the drug

0048-7333/02/$ – see front matter © 2002 Elsevier Science B.V. All rights reserved.PII: S0048-7333(00)00157-8

160 M. Sobrero, E.B. Roberts / Research Policy 31 (2002) 159–182

development process (Henderson, 1994), as well asin cars (Clark and Fujimoto, 1991; Nobeoka, 1993),mainframes (Iansiti, 1995; Iansiti and Khanna, 1995),and personal computers (Pine, 1993) are often used asexamples.

While the key aspect of networking processes isidentified in the organization of the interaction amongthe partners, the empirical analysis is largely focusedon the structural context of exchange. Both overde-termined and underdetermined approaches to thestudy of joint product development activities examinethe mutual exchange of rights between the partiesinvolved. On the one hand, the agents involved aremodelled as rationally optimizing the contractualform of exchange in a typical market/hierarchy con-tinuum. Different characteristics of the developmentwork and of the partners’ resource set guide the choiceamong alternative forms such as long term contracts(Monteverde and Teece, 1982; Ouchi and Bolton,1988; Pisano, 1991), strategic alliances (Roberts andBerry, 1985; Ciborra, 1991; Hamel, 1991), or R&Dconsortia (Ouchi and Bolton, 1988; Watkins, 1991;Tripsas et al., 1995). On the other hand, higher levelinstitutional conditions idiosyncratic to the locus ofinteraction determine the predominant form of ex-change and the set of norms and rules governingthe relationship. Several studies performed in Japan(Dore, 1986; Fruin, 1992; Nishiguchi, 1995) and in lo-calized communities such as Silicon Valley (Saxenian,1994) or the European industrial districts (Piore andSabel, 1984; Best, 1990; Harrison, 1994) describe thereliance on trust among the partners as a substitutefor more stringent legal protection mechanisms.

This paper goes into the “black box” of inter-partnerexchanges in innovative activities to develop theoret-ically and document empirically the complementaryrole of the organization of the interface. Buildingon some recent studies at the information processinglevel of inter-organizational relationships in new prod-uct development activities (Clark, 1989; Liker et al.,1995; Bidault, 1998; Sobrero and Roberts, 2001) weanalyze 50 manufacturer–supplier relations in newproduct development projects performed by threedifferent business units, operating in two differentcountries, of one of the largest European Major HomeAppliance manufacturers. We distinguish between thelegal definition of the exchange and the operationalmechanisms used to integrate the flow of information

between the parties during the development work.Data show invariance in the specificity and extensionof the contracts governing the relationships. On thecontrary, differences in the type of mechanisms used toexchange information and the extent of their use dur-ing the project are significantly related to the degreeof supplier involvement. Choices along integrationdimensions are associated with different evaluationsby the manufacturer of the specific relationship. Lessarticulate solutions with later involvement of suppliersand their use as pure subcontractors of pre-specifieddevelopment work are considered by the manufac-turer as positively affecting project efficiency, but notas opportunities for learning. On the contrary, higherlevel of communication, earlier supplier involvementin the project and a higher level of design responsi-bility assigned to the supplier seem to generate highercoordination costs, but also provide the opportunityfor effectively accessing external knowledge whoseconsequences are spread in future projects.

This research offers several theoretical and policycontributions to the understanding and managementof inter-organizational relationships in innovativeactivities. First, institutional decisions driving the gov-ernance of inter-firm relations and their organizationalimplementation are recomposed. The contractual per-spective of Transaction Cost Economics is comple-mented with the information processing interpretationof organizational exchange. Second, the operationalmechanisms available to structure inter-unit flows areextended to inter-organizational relations and relatedto the nature of the joint work, using the dyad as theunit of analysis. Third, the distinctions among differ-ent relational outcomes point to the trade-off betweenshort and long term objectives as a central issue inguiding relational strategies.

From a strategy perspective, these results suggestthe centrality of a planned effort on the organizationalimplementation of inter-organizational relations,which should synchronically complement contrac-tual negotiations, rather than sequentially supplementthem. In addition to that, the empirical results directlysuggest a careful examination of partners’ objectivesto determine the task-domain in which to interactand how to organize the joint work. Despite all theemphasis on the benefits of networking, in fact,inter-organizational relations are not free, and a rushtoward the currently hot boundary spanning strategy

M. Sobrero, E.B. Roberts / Research Policy 31 (2002) 159–182 161

might prove costly, especially when technologicalinnovation is at stake.

The paper is organized as follows. In Section 2, wereview the different approaches to inter-organizationalrelationships in technology development and the in-formation processing view of the organization ofinnovative work, deriving the complementarity ofthe contractual and organizational structuring of therelationship. In Section 3, we introduce the studydesigned to examine these complementarities in thecontext of supplier–manufacturer relationships in newproduct development, describing the methodologyused and the industrial setting chosen. In Section 4,we present the results and discuss their implicationsfor the management of supplier relationships in newproduct development projects. In Section 5, we con-clude by interpreting these results for the more generalproblem of the organization of information flows ininter-organizational relationships, discussing the lim-its and potentiality for further extension of this work.

2. Theoretical premises

2.1. Inter-firm relationships and innovative processes

The empirical observation of the increasingimportance of interactions among legally distin-guished units challenged the traditional image of anorganization as an entity with well-defined bound-aries (Contractor and Lorange, 1988). Clearly, onecrucial activity influenced by these changes is thedevelopment of innovation (Roberts, 1980). Follow-ing Kogut (1988), we can identify three theoreticalapproaches for the analysis of inter-firm relations: atransaction–cost based approach, a strategic approachand an organizational learning approach.

Studies based on the assumptions and proposi-tions of transaction cost theory (Williamson, 1975,1985) focus on the characteristics of the interactionsinvolved in the development of innovation (Ouchiand Bolton, 1988). Given actors’ characteristics(propensity to opportunistic behavior and boundedrationality), task related factors (asset specificity anduncertainty) are used to identify the appropriatenessto engage in interactions with other subjects and todetermine the optimal governance structure (Pisano,1990). Accordingly, research has been addressing the

conditions under which the sum of production andtransaction costs will be minimized through inter-nalization (Pisano, 1991), market driven transactionssuch as licensing, or other intermediate forms of gov-ernance structure such as joint ventures (Hladik, 1988)and consortia (Watkins, 1991; Tripsas et al., 1995).

Complementary to the inward focus on efficiencyachievements, the strategic perspective on organiza-tional interactions stresses how, by pooling their re-sources and efforts towards innovation, all the partnersinvolved would improve their competitive position-ing (Gulati, 1998). Collaborative activities becomea way to overcome asymmetries in the resource en-dowments and spread the risks associated with inno-vative activity (Combs, 1990), to control spillovers(Katz, 1986), or to limit the opportunities for newentrants in the market by indirectly raising barriersto entry (Katz, 1986; Katz and Ordover, 1990). Oncethe determinants for collaboration in innovation pro-cesses are set, the possible alternatives (e.g. joint ven-tures, acquisitions, licensing) are examined throughan analysis of either environment specific conditionssuch as, for example, the “appropriability regime”(Teece, 1986), or the firm resource set (Roberts andBerry, 1985).

The organizational learning explanation departsfrom the economic nature of the determinants of apositive role of inter-organizational relationships inthe development of innovation (Kogut, 1988). In par-ticular, it claims that R&D activities are “interactingheuristic search processes” (Nelson and Winter, 1977,p. 52) and that the very knowledge being developedis organizationally embedded. Therefore, its trans-fer cannot be achieved through a market transactionbecause it is partly tacit (Polanyi, 1967). However,organizations cannot rely simply on their own internalknowledge base since the routines developed aroundit become embedded, constraining departures fromwell-known and explored paths (Nelson and Winter,1982) and acting as filters to the introduction of inno-vation (Henderson and Clark, 1990). On the contrary,by widening the sources of knowledge to includeexternal organizations, resistance created by internalstructural filters would be overtaken (Kogut and Zan-der, 1992). Moreover, the use of collaborative arrange-ments allowing for mutual access to internal processeswill facilitate both the development and the transferof tacit knowledge (Hamel, 1991; Gulati, 1998).


Regardless of the differences in the approach tothe analysis of inter-organizational relations, the threestreams of research mainly focus on the conditionsunder which it would be appropriate for firms toengage in cooperative actions to pursue innovation.Much less attention, on the contrary, is given to therole that alternative organizational forms of coordi-nation and integration among the partners might havein determining the outcome of the relation (Robertsand Berry, 1985). The emphasis is on the definitionof the conditions for the interaction to occur, ratherthan on how the relationship is then managed andthe actual contacts among the partners are opera-tionally implemented. To emphasize the necessarycomplementarity of such aspects required to make therelationship work, in the next section, we discuss therole of organizational design in innovative activity.

2.2. Organization structure and innovative processes

Albeit almost neglected in the particular contextof inter-organizational relations, the importance oforganizational structures and processes and their in-teraction with task characteristics are strongly rootedin the organizational theory literature. Starting fromthe seminal works of Burns and Stalker (1961),Woodward (1965), and Lawrence and Lorsch (1967),the contingency school developed both at the macrolevel, exploring the concept of fit between organiza-tional and environment characteristics (Aldrich, 1972;Duncan, 1972, 1976), and at the micro level, investi-gating the relationship between nature of the task andstructural characteristics (Perrow, 1967; Allen, 1986;Larson and Gobeli, 1988).

Burns and Stalker (1961) first proposed that anorganization’s characteristics are a function of envi-ronmental uncertainty. Lawrence and Lorsch (1967)continued in this direction by showing how environ-mental conditions, and hence organizational structure,could vary within the same organization among its dif-ferent units. Organizational design therefore becamecentral, and detailed work was conducted in deter-mining in more depth the effectiveness of differentorganizational forms (Galbraith, 1973, 1977).

Innovation development activities, i.e. activitiescharacterized by ill-defined tasks in uncertain envi-ronments, started to attract researchers’ attention. Theunit of analysis was therefore shifted to a lower level,

usually the single project, focusing on the differ-ences in effectiveness of alternative solutions in thefunctional/project spectrum (Marquis and Straight,1965; Larson and Gobeli, 1988; Roberts, 1988), theinfluence of patterns of communication on the finaloutcome (Marquis and Straight, 1965; Allen, 1977;Tushman, 1978; Allen and Katz, 1986; Allen andHauptman, 1987), and the role of human resourcemanagement practices (Katz and Allen, 1985; Allenand Katz, 1990).

Only recently have researchers turned their attentionto the analysis of the different organizational coor-dination mechanisms in inter-organizational relation-ships. At a macro level, for example, Rebentish andFerretti (1995), studying technology transfer withininternational joint ventures in the chemical and steelindustry, develop a model where the characteristics ofthe object being transferred (transfer scope) and thecharacteristics of the organizational structure used toachieve the transfer (transfer method) concur in deter-mining the success of the transfer. Similar argumentsare developed by (Hakansson, 1987, 1989) who pro-vide evidence through different case studies about howthe strengths of certain Swedish industries are basedon specific investments in the organizational coordi-nation of a nexus of relationships at the industry level.

Imai and colleagues’ (1985) work on supplier–manufacturer relationships in new product develop-ment presents evidence from five in-depth case stud-ies of Japanese firms. Their research covers differentindustries, from electronics (Epson dot-matrix printer,NEC PC8000, Fuji FX-3500 paper copier) to pho-tographic equipment (Canon Auto-Boy lens shuttercamera), to automobiles (Honda City). Suppliers’early involvement in the development process and theintense patterns of communication flows are indicatedas driving forces for faster releases of new devicesand prompt responses to competitors’ moves. Simi-lar conclusions are supported by subsequent researchin the world auto industry (Clark, 1989; Clark andFujimoto, 1991), showing lower costs and shorterlead-time associated with higher levels of supplierinvolvement and higher use of off-the-shelf parts, con-trolling for industry, project and geographical levelcharacteristics. Overall, greater supplier involvementaccounts for roughly one-third of the Japanese ad-vantage in engineering hours and 4–5 months of theirlead time advantage.


More detailed analyses of the micro-organizationalmechanisms used to coordinate suppliers’ participa-tion in new product development extend these results.In two other studies (Sobrero and Toulan, 2000;Sobrero and Roberts, 2001) of supplier–manufacturerrelationships in new product development projects, weshowed that the type of knowledge being partitionedand its level of interdependency with the rest of theproject are important predictors of performance out-comes of the relationship, controlling for contractualdifferences. Further, the analyses demonstrate a cleartrade-off between short term efficiency-increasing andlonger term learning-enhancing outcomes. While firm(Dyer and Ouchi, 1993; Dyer, 1996; Nishiguchi andIkeda, 1996) and country level (Helper, 1991; Likeret al., 1995; Nishiguchi, 1995) differences seem to betime-dependent and to show convergent patterns, allthese works independently support the importance ofadequate investments in the organizational structuringof exchange flows according to the characteristics ofthe tasks jointly performed. Choices along the fre-quency of communication between the partners, thetype of communication channels used, the timing ofpartners’ involvements in the problem solving processand the assignment of specific design responsibilitymust be accurately balanced to have a positive impacton project outcomes.

2.3. The research framework

These two different research approaches to theanalysis of inter-organizational coordination mech-anisms stress separate albeit complementary aspectsof the same problem (Sobrero and Schrader, 1998).On the one hand, strategic approaches examine theinstitutional governance mechanisms necessary todefine the rule set agreed upon by the partners. Thefocus is on the mutual exchange of rights among theparties involved. On the other hand, organizationalapproaches highlight the informational characteris-tics of the interaction. The focus is on the possiblealternatives to put into place the mutual exchange ofinformation among the partners.

The choice along both dimensions is related to thecharacteristics of the tasks performed in the relation-ship. Combining the different perspectives reviewed,the task domain can be articulated focusing on threeaspects: asset specificity, means uncertainty, and goal

uncertainty. Asset specificity determines the extentto which the activities performed in the relationshipshave some economic value per se or not (Williamson,1979). The higher the asset specificity, the lower thechances for the partners to benefit from their activitiesoutside the relationship. The level of task uncertaintycan be referred to the action or to the goal domain(Thompson, 1967). In the first case, the partners haveagreed on the objective of their relationships buthave multiple options to achieve the goal. Ring andRands (1989), for example, document how NASAand 3M were able to specify up front their goal forcommon projects on microgravity experiments andsubsequently worked through the implementation oftheir collaboration. In the second case, the goal itselfis unclear. These situations have been documented inmany studies of collaborative R&D projects, whenthe partners might initiate the relationship for somegeneric strategic reason but lack an operational objec-tive (Brockhoff, 1992; Kleinknecht and Reijen, 1992;Tripsas et al., 1995).

Given different characteristics of the tasks to beperformed within the relationship, the partners canstructure the interaction by (a) articulating the legalconditions governing the transaction and (b) identi-fying the mechanisms to transfer information amongthem to implement the transaction. Contractualcoordination mechanisms are used to define the legalboundaries of the relationships. They involve thechoice of the legal form governing the agreement (e.g.joint venture or strategic alliance, equity and non-equity joint venture), the length of the agreement, theextent to which partners are bound to the agreement(e.g. exclusivity clauses, penalties) and the degree towhich these choices are specific to the agreement ornot (e.g. standardized versus personalized contracts).Research shows the impact on relationship perfor-mance of these choices. Studying strategic alliances,for example, Parkhe (1993) documents how the def-inition of contractual safeguards positively affectedthe fulfillment of partners’ strategic objectives. Simi-larly, in a sample of Scandinavian collaborative, R&Dventures Hakanson (1993) finds that a clear contrac-tual definition of ex-ante safeguards decreases thelikelihood of anticipated termination of the venture.

Information transferring mechanisms are used asan alternative way to put into place the relation-ships within the institutional boundaries defined by


means of the contractual coordination mechanismschosen. They are targeted to the structuring of in-formation flows between the partners. Decisions onthe frequency, timing, directionality of informationflows, as well as the means through which these flowsoccur identify the operational dimensions of procedu-ral coordination mechanisms. For a given institutionalsetting defined by a specific combination of contrac-tual coordination mechanisms, alternative choices ofinformation transferring coordination mechanisms aregoing to impact the outcome of the relationship dif-ferently. Carter and Miller (1989), for example, showhow frequent and bilateral communication betweenvendors and buyers sensibly limited the occurrenceof quality problems in the materials delivered. Dyer(1996) reports that higher levels of face to face com-munications between suppliers and manufacturerscontribute to reduce new model cycle time. Hakan-son (1993) documents the positive impact of thecoordination procedures used by the partners on thesurvival of collaborative R&D ventures, provided thatmanagerial autonomy is granted by avoiding detailedspecification of implementation procedures within thecontractual arrangement.

To examine fully how partners should organizetheir relationships to achieve the intended goals, both

Fig. 1. The theoretical framework.

dimensions must therefore be considered (see Fig. 1).First, choices on both dimensions are linked to thecharacteristics of the tasks jointly performed. Second,they both independently account for the performanceof the relationship. Third, their combination mightin and of itself be a strategic lever to be used bythe partners. In the next sections, we present a studyof supplier–manufacturer relationships designed toinclude in the analysis all these aspects, to deepenour understanding of the implications of structuringdecisions in innovation processes.

3. The study

We studied the whole population of 50 differentsupplier–manufacturer relationships for the develop-ment of new components or new equipment in threedevelopment projects performed between 1993 and1995 by three business units (SBUs) of one of the fivelargest European groups in the Major Home Appli-ances industry. The existence of an established bodyof research on supplier–manufacturer relationshipsprovides a valuable opportunity to anchor the empir-ical analysis to a policy domain where the strategicrelevance of the problem examined can be easily


appreciated. The Major Home Appliance industry ischaracterized by complex assembled products madeof parts and subsystems requiring the combinationof different knowledge domains, from mechanics toelectronics to plastic molding. The evolutionary pat-terns of this industry in Europe show how cyclicalinteractions between product and process innovationhave converged towards highly fragmented and tem-porarily unstable patterns of consumption, generatingat the same time the constraints of large scale man-ufacturing and the opportunities for creative productdifferentiation (Sobrero, 1995).

Firms’ successful responses to these challengeshave been a constant shaping of internal structuresaround the technological base. Failures of thesestrategies resulted in exits at different times (Goshaland Haspeslagh, 1990). The contemporary need forsize and scope has not been achieved merely byfunctional or geographical separation, but ratherfostered through increased inter-unit coordination(Baden-Fuller and Stopford, 1991). Specific activities,such as product development, where different andfrequently contradictory task characteristics are con-veyed, became the institutional environment to shapethe internal and external structure of the organizationand to adapt it to the changed nature of the externalenvironment.

Within this context, suppliers are being calledupon to play an ever increasingly important role. Thestrategic relevance of product–process interaction,the shortening product life cycles, and the need tobalance volumes with product differentiation requirehome appliance manufacturers to focus on processesand product architecture knowledge. Such knowledge,though, cannot successfully be exploited withoutalso utilizing components-related knowledge. Exter-nal sources are used more and more to complementinternal competencies, subcontracting the control ofparts-related knowledge domains. The internal re-organization is hence accompanied by the need toappropriately structure the supplier chain within newproduct development activities.

3.1. Methodology

The study uses a multi-case and multi-unit of analy-sis approach to explore if (a) the characteristics of theobject of the relationships affect structuring decisions,

and if (b) the relationship structuring decisions affectthe relationships outcomes. This design is particularlyadvantageous to approach these research questions(Yin, 1994) because (1) the phenomena investigatedare recent or even contemporary, (2) the phenomenainvestigated are analyzed within a specific context,(3) the research is focused on “how” and “why”aspects, and (4) the researcher has limited controlover the phenomena.

Multiple sources of information are used to avoidtypical potential sources of bias deriving from organi-zational role, individual’s memory failure, protectionmechanisms and the like. The a priori identificationof multiple units of analysis allows the structured col-lection of a larger amount of information. Finally, thestratification of the units of analysis and sources ofinformation allows mapping the within-case sourcesof variance and determines a base of comparison formulti-case analysis. Specific actions were taken toavoid threats to validity (Yin, 1994; Stake, 1995).To control for the construct validity of the results,we triangulated different sources of information andconfronted the fit between the analytical categoriesselected and the data representation derived. This pro-cess is also suggested to control for internal validitybiases, as introducing possible alternative sources ofvariance and forcing the analysis to resolve incon-gruencies between sources. To further strengthen theinternal validity of the study, data were collected atthree different levels of analysis: the business unit,the project, and the relationship between a supplierand the SBU manufacturer.

Multiple cases were selected to strengthen theexternal validity of the results. It is important, how-ever, to define properly the generalizability domain(Eisenhardt, 1989). Within case-studies, in fact, gen-eralizability refers to the analytical level and not, asis more usual, to the statistical level. In the first case,the discriminant criterion lies in the adherence of theselected observation to the logical categories definedup front, and it suffices to define certain dimensionsand find matches between them and the selected cases.In the second case, instead, representativeness isdefined by the attributional properties of the sam-ple with respect to the larger population of whichit is a part, which has to be defined up front todevise the appropriate sampling strategy. The goalhere was to achieve analytical representativeness of


inter-organizational relationships in the developmentof innovation.

3.2. Case selection

Three separate SBUs of one of the five largestEuropean Major Home Appliance groups agreed toparticipate in the study. The group has facilities lo-cated all around Europe and operates in differentcountries both with multiple brands and as the OEMfor large retailers. It produces the whole product lineof major home appliances, from refrigerators (“cold”line) to washing machines (“wet” line) and kitchenstoves and ovens (“hot” line). The SBUs selectedoperate in two different countries. Two SBUs produceand develop different ranges of products in the “wet”line and the third one develops and produces thewhole “cold” line. All of them produce for all groupbrands.

Within each unit, we selected one new productdevelopment project with the aid of top managers,namely the chief executive officer (CEO), the groupmanaging director and the group R&D director.Top managers were considered the most appropriateinformants because of their overall knowledge of the

Table 1Informants, selection criteria and rationale for the identification of product development projects

Informant Selection criteria Rationale

Top management Degree of internal market and technologicalinnovativeness (one radical, one incrementaland one in between the two)

To partition ex-ante the projects withinhomogeneous classesTo identify an internal benchmark withrespect to an external one in order tocircumstantiate change within a specificrealityTo map the widest possible range ofinnovative projectsTo recognize the complementary natureof market and technological newness

Recency (finished not more than 1 year priorto beginning of research)

To avoid memory retrieval problemsTo limit ex-post rationalizations embeddedin the shared organizational memoryTo take into account typical developmenttimes in the industry

Representativeness (prototypical of certainclass of projects)

To minimize between case variance withinhomogeneous classesTo avoid rare cases or outliers

project portfolio, the impact of each project on theSBU and the group marketing strategy, and an indirectinvolvement in the project. The selection processwas guided by the following three criteria (see alsoTable 1).

3.2.1. Degree of innovativenessFocusing on a new product development project,

the first necessary step is to define the extent to whichthe project represents major or minor departuresfrom the SBU’s existing competencies. Innovative-ness is therefore defined here as change with respectto the established knowledge base of the observedunit (Henderson and Clark, 1990). The knowledgebase itself is articulated into a technical and marketknowledge base (Abernathy and Clark, 1985; Robertsand Berry, 1985). Working with the top management,three projects were selected to span across the inno-vativeness domain, assessing the extent to which thespecific project represented a departure from existingmarket and technological competencies at the givenSBU level. One case is about a radical departure fromexisting competencies, another one is about incre-mental departure, and the third one lies somewhere inthe middle.


3.2.2. RecencyThe second requirement for project selection was

the timing of its completion. In addition to consider-ing typical memory retrieval problems in the analysisof past events, the issue of timing needs to account forindustry specific development cycles (Baden-Fullerand Stopford, 1991; Sobrero, 1995). Following bothmethodological and context specific considerations,the selection criteria required the project not be endedearlier than 1 year prior to the beginning of the study.

3.2.3. RepresentativenessThe third criterion is related to the first and reflects

the intention, within the study, not to sample outliers.Although this is considered a common research strat-egy whenever using case-design, the intention herewas to avoid either rare or peculiar cases. Rather, to en-sure analytical representativeness, the project selectedmust have been considered typical of its own innova-tiveness category.

3.3. Data collection

To address the usual concerns on the reliability ofthe data gathering process in qualitative research, weused a priori developed data protocols (Yin, 1994).These protocols identified a set of items to be coveredin the data collection and their logical relationships.

Table 2An account of the interviewing activity: number of interviews by round, unit and informanta

Round Purpose Informant Unit

A B C

1 To select the projects Group CEO, group CTO, 5 5 4To obtain an historical account of the company and of each unit group CPOTo define the technical and market evolution of the company’s productsTo determine the company’s purchasing strategies

2 To confirm the evidence collected in the previous round Unit CTO 7 7 6To reconstruct the history of the project examined

3 To confirm the evidence collected in the previous round Unit CPO, PM, designers, 7 7 8To reconstruct the history of the project examined engineering, directorTo identify specific instances of interactions with suppliers

4 To confirm the evidence collected in the previous round Unit CPO, PM, designers, 7 6 5To analyze each relationship with suppliers engineering, director

Total 26 25 23

a CEO: chief executive officer; CTO: chief technology officer; CPO: chief purchasing officer; PM: project manager.

They were used to guide the field research, to providea standard format for data coding, and as a device tobe challenged with new evidence emerging from theanalysis. Whenever new elements not initially consid-ered were included, old notes were re-elaborated toaddress the new aspects and further data collectionfollowed if data were not available.

Data were collected between March 1995 and Jan-uary 1996 through direct interviews, the analysis ofinternal records, and public sources such as industryspecific newsletters, consumer reports and businesspress. After selecting the projects, a first round ofinterviews was conducted with “top management” togather general data at the group level (see Table 2).In addition to an historical account of the group evo-lution and growth during the years, and its currentpositioning in the European markets, some specificissues were covered with the group R&D directorand the group purchasing director. With the first, to-gether with each unit R&D manager, we examinedthe evolution of the product families at the “unit”level. With the second, the general purchasing strate-gies and objectives were discussed at length. The goalhere was two-fold. First, we wanted to place eachproject within the proper product and market relatedcontext. Second, we wanted to identify the generalenvironment in which the relationships with supplierswe were going to study were being activated.


The second round of interviews was conducted atthe “unit” level. With the R&D manager, we recon-structed an historical account of each project, bothdirectly through his descriptions, and indirectly by ac-cessing internal reports, budgets and product planningdocuments. Typically, after a first meeting organizedalong these lines, we were granted access to archivaldocuments that we used to triangulate the informationcollected during the interview. For each project, weidentified the different phases, their timing and costs,an articulation of the different dimensions of theproblem solving activities, which organizational unitswere involved and responsible during the differentphases, major difficulties encountered and unresolvedissues, and a judgment on the overall performanceof the project both financially and organizationally.We then prepared a summary of the evidence col-lected and of the discrepancies that had emerged.This summary was used as the basis of a subsequentdiscussion, after which the process was repeated onemore time, for a total of three interviews which lastedbetween 2 and 4 h each.

During these interviews, in addition to deepeningthe understanding of the project, particular attentionwas given to the identification of other key informants,with whom a third set of interviews was conducted.The purpose was to confirm the evidence collectedon the project and to go into greater depth about thespecific interactions with suppliers. The intervieweeswere the Project Manager, some designers, key peo-ple from the Engineering Department, and the UnitPurchasing Director. The interviews with each personlasted between 1 and 2 h and covered their individ-ual role in the project and any account of specificinteractions with suppliers.

Working with the Project Manager and the UnitPurchasing Director, we developed a list of all thesuppliers that were involved at some stage of theproject. This list was used as a basis for further dis-cussion with the project members about each singlerelation with the supplier through a fourth round ofdirect interviews. First, we discussed at length thecharacteristics of each single interaction (e.g. whatwas the supplier called to do, at which stage was itinvolved, what type of communication channels wereused), and the responses collected were reviewedwith the informants to resolve any major inconsis-tencies. Then, we distributed to the project manager

a structured questionnaire to obtain a judgmentalindication of each single relationship’s performance.

4. Data analysis

4.1. The context

The three SBUs selected can be consideredrepresentative of strategic players operating in today’smature mass markets. They are focused on spe-cific product segments within which they supportall group brands. The export share is therefore quitehigh (see Table 3), even for unit C, which offers ageographically-specific product. Productivity levels,measured in number of pieces per employee, arewithin industry average (Paba, 1991), and so are thenumber of different product codes recorded in the pro-duction plan. Overall, these data offer more specificevidence for the general characteristics of fragmenta-tion of consumer preferences and excess of installedmanufacturing capacity, pushing for technical sepa-ration of product responsibilities into separate units,able to serve the whole set of brands used by thegroup both in local markets and all around Europe.

Suppliers participate intensively in this organizationof production. Total purchases account for between26 and 65% of each SBU’s sales. Even the lower 26%value for unit A is fairly high, considering the levelof vertical integration of refrigerator plants. Despitethis key role, purchasing strategies are quite differentfrom one unit to another. Unit C uses formal ven-dor rating procedures and has initiated a program toreduce the number of suppliers and introduce a qual-ity certification system. Units A and B, in contrast,lack any strategic action on supply management. The

Table 3Main characteristics of the three SBUs: mean yearly values1990–1994

A B C

Product segment Cold Wet WetProductivitya 564 613 587Export (%) 40 30 14No. of models produced 600 600 150Purchasing costs (%)b 26 60 65

a Number of pieces per employee.b As a percentage of total SBU sales.


purchasing office is organized in two second levelunits, one for components and materials and the otherfor manufacturing equipment. There are some attem-pts to monitor suppliers’ capability to respect somegiven quality levels, but attention is primarily given tomanufacturing activities and does not take into con-sideration a more integrated vision of vertical relation-ships to include new product development activitiesas well.

Within these specific contexts, the three projectswere selected by design to represent different inno-vation efforts. The first project, developed in unit A,was targeted to the introduction of new models in anexisting product family (different sizes in a line ofrefrigerators). The second project, developed in unitB, was centered around the re-engineering of a keysubsystem (the washing group in a washing machine).The third project, developed in unit C, was targeted tothe complete redesign of a new product platform andthe corresponding changes in the manufacturing plant.

Due to confidentiality reasons, projects cannot becompared using financial data. Yet some other quiteinformative dimensions can be used instead (seeTable 4). Total development time from the officiallaunch of the project to the beginning of productionis 13 months for project A, 30 months for projectB, and 50 months for project C. The targeted costreduction, measured in real values with respect to thecorresponding previous product generation is about2.5% for project A, 3% for project B and a high 10%for project C. The expected product life is more sen-sitive to the specific product–market conditions, witha low of 3 years for project B, a high of 10 years forproject C, and 5 years for project A.

The percentage of new components with respectto previous products is in general fairly high, despite

Table 4The three projects: main characteristics

A B C

New components (%)a 90 55 95Development time (months) 13 30 50Components reduction (%)a 25 27 20Cost reduction target (%)b 2.5 3 10Expected product life (years) 5 3 10

a In comparison with previous product generation.b Real values, relative to previous product generation.

between-project differences, indicating how central isthe overall product architecture engineering to harmo-nize the technical subsystems included in the product.For this reason, all projects are also targeted to highlevels of components reduction, reflecting the type ofinnovative efforts performed. In project A, the value isthe highest, with a target of 27% fewer components.In project C, on the contrary, the value is the lowest,with a target of 20%, and project B somewhere in themiddle, with a target of 25%. The more the innova-tive activity is limited in its scope, the more the effortsare focused on more stringent product rationalizationplans, with rather limited direct opportunities on themanufacturing side. Product simplification, in fact, po-tentially determines at the same time a reduction ofmaterial costs and of direct costs through the elimi-nation of manufacturing activities. In contrast, moreinnovative projects like project C can specifically in-corporate in the new design radical intervention on theprocess side, and leave to future projects more focusedactions on the overall product architecture.

4.2. Characteristics of the tasks jointly performed

Within all three projects, suppliers played a centralrole in the development of new solutions. Overall,11, 18, and 21 suppliers of components or dedi-cated equipment were involved at some stage of thedevelopment process and assigned specific designresponsibilities in projects A, B, and C, respectively.Their activities accounted for about 25% of the finalmanufacturing cost for project A, 20% for project B,and 27% for project C. These are quite large values,if one takes a closer look at their economic implica-tions. In the case of washing machines, for example,the full manufacturing cost is around US$ 170 perunit. If the project target is to reduce such cost by3%, this means to save in real terms US$ 5.40 perunit. A clear distinction of the activities performed bysuppliers and how these relationships are structuredtherefore becomes a key strategic issue to be managedby the manufacturer, not only ex-post on the produc-tion side, but also ex-ante during the developmentprocess itself. Extensive interviews were conductedwith each Project Manager to distinguish what kindof development work was assigned and what kind ofdesign autonomy and responsibility was granted toeach supplier. After an initial round of interviews, a


first classification of the relationships discussed wasprovided to the interviewee, together with an accountof the evidence that emerged during previous meet-ings. Possible disagreements were resolved during anadditional round of interviews and through the use ofinternal documents.

Four typologies of interactions were identifiedthrough this process (Sobrero and Roberts, 2001). Inthe first case, all design work and related problemsolving was done internally. The supplier receiveddetailed drawings and technical specifications to bemet for a component which was not considered tocritically affect other parts of the overall project.The supplier’s action domain was therefore limitedto meet these technical specifications. This grouprepresents the traditional subcontracting approach innew product development and is therefore labelled“traditional subcontracting” parts.

In the second case, suppliers were involved in thedesign of components, which might critically impactother parts of the project. The control over suppliers’design freedom was imposed indirectly by the up-frontdefinition of the interface specification provided. Inthis type of relationship, suppliers were recognizedas an important source of knowledge, but the char-acteristics of the component suggested limiting theirfreedom in problem solving activities. In a way, theyare integrated into the manufacturer’s problem solv-ing logic and process. We label this group “integratedsubcontracting” parts.

In the third case, suppliers worked on componentswith low interdependency with the rest of the project.The manufacturer here limited its own activities by sel-ecting an area of the project and delegating it entirelyto the supplier. The supplier domain of action wastherefore widened, albeit limited to areas of potentiallylow influence on the overall project. In this type ofrelationship, the manufacturer tried to access a specificknowledge domain of the supplier, without limiting itspotential outcome by a predetermined set of solutions.We called this group “advanced subcontracting” parts.

In the fourth case, suppliers were responsible forthe whole problem solving activity for highly criticalcomponents. Despite the potentially high influence onthe overall project, suppliers were given freedom todefine the solution starting from the concept designdomain and then moving to the functional parameterdomain (Alexander, 1964; Clark, 1985). This practice

has been highly documented in Japanese firms as away to reduce the overall product development timeand costs (Imai et al., 1985; Clark, 1989). Componentsdeveloped according to these arrangements have beenidentified as “black box” parts which term we there-fore adopted as our label.

Fig. 2 reports data on the economic impact of eachcategory of relationships for the three projects studied,measured as the percentage of full manufacturing costaccounted for by externally developed components.Suppliers’ involvement goes well beyond the meredesign of already well-defined engineering solutionstypical of “traditional subcontracting” parts. Rela-tionships requiring specific interactions to integrateexternal solutions in the overall product architectureare at the core of the economic impact of suppliers onthe project. Most of the outside involvement is cen-tered on “integrated subcontracting” and “advancedsubcontracting” parts, while reliance on “black box”parts seems fairly limited with respect to what hasbeen observed in other studies (Clark and Fujimoto,1991; Liker et al., 1995; Dyer, 1996).

This can partly be explained by the nature of thetechnology involved. Innovation in major home appli-ances comes from investments in product architectureand process flexibility, rather than from the inclusionof sophisticated components or subsystems alone. Onthe one hand, it would be hardly perceived by the con-sumer; on the other hand, the different technologiesused tend to be rather mature. Even the most recentefforts towards the production of “intelligent”machines relying on fuzzy logic programmed micro-processors are based on the integration and adapta-tion of knowledge already used in other industries.External sources therefore become potentially usefulin the process as long as the manufacturer controlsand masters their coordination and integration in theprocess. In the next paragraphs, we therefore turn theattention to the contractual and information transfermechanisms used in the sample observed.

4.3. Contractual coordination mechanisms

To evaluate the extent to which each one of the mul-tiple interactions activated within the three projectswas governed by a set of contractual coordinationmechanisms explicitly articulated for that specific rela-tionship, we asked each unit’s purchasing manager


Fig. 2. Total value of supply by type and group (% of full manufacturing cost).

two different questions: first, if the contract negoti-ated with the supplier included elements regulatinga set of 10 items2 derived from previous researchon European purchasing activities (Zanoni, 1984);and second, for each of these items, to indicate ona 5-points Likert scale their positioning between re-lying on standard contracts (1) and negotiating aspecific agreement (5). In this way, information onthe breadth of the contractual arrangement and on itsspecificity was collected for each one of the 50 dyadicrelationships (Cronbach’sα = 0.78). The scores oneach item were then added up and divided by 10 (forthe 10 items), generating a final index between 0 (noelement included in the contract) and 5 (all elementsexplicitly negotiated for that specific relationshipincluded in the contract).

Fig. 3 reports the values of this index measuringthe extent of use of contractual coordination mecha-nisms for each project, distinguishing different typesof supply. Clearly, the attention paid to the contrac-tual definition of several contingencies is limited.

2 The items were price, quantity, quality levels, lead time, vol-ume elasticity, order activating procedures, penalties and fines,exclusivity, control mechanisms, renewal.

While there are no statistically significant differencesamong supply types (F3,44 = 0.32, n.s.), the use ofcontractual coordination mechanisms varies amongprojects (F2,44 = 11.26, P < 0.001). A closer lookat the use of each of the items considered for a con-tract, however, limits the substantial implications ofinter-project differences along the contractual coordi-nation dimension (see Fig. 4).

Only quantity and price items are included in allcontracts, while more sophisticated items such as somekind of agreement governing volume elasticity, howorders are activated, the possibility to rely on penaltiesor fines, and ex-ante options to renew the contract arenever present in any of the relationships observed. Thedetected differences are explained by the inclusion ofspecific clauses regulating suppliers’ quality levels,the mechanisms to control such levels and exclusiv-ity agreements in 5 contracts out of 11 in project A.Contracts are here used as a substitute for more elab-orated form of supplier management such as the onebeing introduced in unit C, where the certification anddefinition of specific vendor rating procedures makeindividual negotiations on these aspects redundant.

Previous research suggested the importance ofrepetitive interaction among the partners to foster


Fig. 3. Contract specificity by supply type and project.

mutual reliance, favor inter-partner knowledge andlimit the need for leveraging on contracts (Hamel,1991; Heide and Miner, 1992; Powell and Brantley,1992). The percentage of suppliers involved in theproject which had already interacted with the differentunits in the past is quite high (see Table 5), rangingfrom 72% for project A to 86% for project C andwith no statistically significant difference among the

Fig. 4. Contract items by cases of use.

projects (F2,47 = 0.41, n.s.). This evidence for a repet-itive interaction effect to explain the low investmentin contractual coordination mechanisms, however, ischallenged by the absence of a significant correlationbetween the existence of a previous relationship andthe level of contractual specification used to governthe interaction observed. There is inconsistency inthe sign, the size and the significance level of the



coefficients computed for each project, with appar-ently supporting evidence emerging only in the caseof project B. A comparison of the three correlationcoefficients standardizing the magnitude differencesand taking into account the unequal sample sizes,however, does not detect any statistical heterogeneityamong them (χ2-test= 3.72, d.f . = 2, n.s.).

Similar results are also obtained when linking theeconomic value of the activity performed within therelationship and the level of contractual specification.Different authors have used cost-based measure ofdyadic interaction to operationalize asset specificity,indicating that high levels of asset specificity justifyinvestments in contractual coordination mechanisms(see, for example, Joskow, 1987). Yet the correlationbetween the value of the component developed en-tirely or in part by the supplier, measured as a percent-age of the cost of the component over the total cost ofthe final product, and the level of contract specificitydoes not support this conclusion. While this seemsto be true in the case of project B, the correlation isnegligible for project C and reversed for project A.Moreover, these apparent differences are not statisti-cally confirmed by the numerical comparison of thethree coefficients (χ2-test= 4.07, d.f . = 2). Finally,we examined the examined the relationship betweensupply type and the level of contractual specification,controlling for possible inter-project differences. Atwo-way ANOVA did not show any significant sup-ply type effect (F3,40 = 1.1, n.s.) or any significantinteraction between supply type and inter-projectdifferences (F4,40 = 0.651, n.s.).

In general, therefore, despite quite substantial dif-ferences in the type of activities performed within therelationships examined, there seem to be no particularinvestments in contractual coordination mechanisms.Contrary to previous evidence, neither a trust-basedexplanation focusing on repetitive contact among thepartners, nor a transaction cost-based explanation fo-cused on the economic value of the interaction canbe exclusively used to account for these choices. Pos-sible influences of a group-level policy towards theform of legal agreements with external actors are alsonot supported by the recorded differences in the threeSBUs’ purchasing strategies and procedures describedbefore. Differences in geographical location of boththe units and the suppliers are not helpful either toassess a predominant role of the external context,

and underdetermined explanations should rather relyon some general patterns of interaction at the wholeindustry level (Granovetter, 1985; Cusumano andTakeishi, 1995). Contrary to what we expected, how-ever, in the sample studied, there are no significantdifferences in the use of the contractual leverage ac-cording to the object of the exchange. This absence ofa strong link between two variables that are oftentimespresented as critical areas for strategic decision mak-ing whenever approaching potential collaboration isparticularly interesting if we consider that the presenceof previous relationships between the partners does notemerge as a significant intervening variable in our data.

Previous research suggested that information trans-ferring mechanisms can be used as substitutes for con-tractual coordination mechanisms (Piore and Sabel,1984; Granovetter, 1985; Best, 1990). Repetitive in-teractions generate inter-partner learning, fosteringtrust and facilitating communication processes. Theinvestments necessary for these changes may alreadysufficiently commit the relationship partners to eachother (Heide and Miner, 1992). Consequently, addi-tional contractually based commitment mechanismsmight not be necessary anymore. In other words,while the task characteristics may suggest that thepartners should establish a high level of contractualcoordination, it may actually be unnecessary to do soif the partners have already committed to each otherthrough previous investments in procedural coordina-tion mechanisms, which contribute to steer decisionson the legal and organizational arrangements chosento govern subsequent interactions.

This evidence suggests the limits of contractualcoordination mechanisms as the main leverage forstructuring inter-organizational relationships, and theneed for a complementary analysis of the informationtransfer mechanisms used in the different cases.

4.4. Procedural coordination mechanisms

For each one of the 50 relationships identified wegathered data to determine (a) how early the supplierwas involved in the project, (b) the extent to whichthe manufacturer and the supplier worked sequen-tially or in overlap during the project, (c) how oftenthey exchanged information, and (d) what kind ofinformation media they used to exchange informa-tion. The first two dimensions take into consideration


Table 6Use of Information transfer mechanisms by type of supply: mean values and inter-group comparisons

Dimension of evaluation Supply type Kruskal–Wallisχ2

Traditional Integrated Advanced Black box

Early involvement 0.62 0.57 0.61 0.71 2.68Degree of overlap 0.28 0.64 0.50 0.44 7.99∗Communication frequency 1.20 2.28 1.92 1.75 16.08∗∗Richness of information media 1.80 2.61 2.38 2.75 8.30∗

∗ P < 0.05.∗∗ P < 0.01.

the results of numerous studies on effective waysto accelerate product development (for a review, seeBrown and Eisenhardt, 1995). To measure early sup-plier involvement, we computed the difference in daysbetween the date of first contact with the supplier in theproject and the end of the project, normalized by thetotal length of the project. The index varies between0 (latest involvement) and 1 (earliest involvement).

To measure the degree of overlap in develop-ment activities, we computed the difference in daysbetween the date the contract was signed and thedate of first contact with the supplier, normalizedagainst the longest time span within each of the threeprojects. The longer this span, the more both partieshad a chance to overlap their activities. The indextherefore varies between 0 (perfectly sequential) and1 (completely overlapping).

The other two dimensions tackle the role played byfrequent and rich information transfer for faster andmore effective problem solving activities (Allen, 1977;Bastien, 1987; Orlikowsky, 1993). In the first case, wemeasured how often the supplier and the manufacturerinteracted during the project. Communication fre-quency was coded using a 3-points Likert scale (1=less than once a month, 3= information more thanonce a month), determining the appropriate anchoringlag through several in-depth interviews. In the secondcase, we measured what kind of information me-dia was used predominantly in the relationship. Fiveoptions ordered hierarchically following a Gutmanscale logic were derived from previous research oncommunication (Rogers and Agarwala-Rogers, 1983)to form a “media type” index for each relationshipranging between 1 and 5: (1) drawings, (2) faxes,(3) meetings, (4) personal communication among theproject members and (5) electronic data exchange.

Table 6 reports the average values of the four indi-cators of procedural coordination mechanisms, distin-guishing by type of activities. In general, all classes ofsuppliers are involved fairly early in the project. Thevalues of the “early involvement” index are all above0.5, indicating that initial contacts with suppliers werealways established in the first half of the project life.The difference among the various classes are not stati-stically significant and the largest value is recorded for“black box” parts, signalling an earlier involvement ofsuppliers in the project for these type of activities.

The analysis of the timing of information transferwithin the relationship provides statistical supportfor differences among relationships types, suggestinghigher levels of overlapping for those activities req-uiring a more direct involvement of suppliers in thedesign phase. The largest value (0.64), however, isrecorded for “integrated subcontracting” parts, indi-cating that the higher level of overlap occurs for acti-vities where the supplier is still quite strongly boundto specific engineering indications communicatedby the manufacturer. Considering how the index isconstructed—i.e. the normalized difference betweenthe date when the contract was signed and the dateof first contact—the results might be suggesting thatin these cases it takes longer to “freeze” the designof the component. With this interpretation in mind,larger values could also signal more intensive infor-mation exchange processes needed to jointly definethe preferred solution.

These intuitions are confirmed by a closer look atthe values of the indicators of frequency and richnessof information transfer. In general, differences amongthe four type of relationships identified on the basisof the design work performed by the parties involvedare statistically confirmed in both cases. Moreover,


relationships with suppliers for the development of“integrated subcontracting” parts require on averagemore frequent communication and use more elabo-rate type of information transfer mechanisms. Theincreasing level of investment in the type of me-dia used to transfer information is also observed ingeneral for more sophisticated type of relationships.Differences in communications frequency, on thecontrary, are less evident when focusing on specificcomparisons between pairs of relationships. “tradi-tional subcontracting” parts are clearly characterizedby the lowest value, but the differences between “ad-vanced subcontracting” parts and “black box” partsare negligible.

The analysis of procedural coordination mecha-nisms offers some elements to unveil the interactionprocesses behind the different types of relationships.In general, we observe that whenever suppliers areassigned problem solving responsibilities, they tendto work in overlap, focusing on a part of the problemwhich then needs to be linked through more fre-quent interactions, using more sophisticated ways oftransferring information. However, if this freedom islimited to the identification of a solution within wellpre-specified boundaries, as is the case with “inte-grated subcontracting” parts, the interaction processseems to require more resources and a larger coordi-nation effort. In these cases, the access to an externalknowledge pool seems to be nominal, as it is con-fined within boundaries pre-specified internally bythe manufacturer. The manufacturer is constrainingthe development of functional parameters, with theidentification of a design concept developed internallyusing an inappropriate knowledge base.

These differences in the interaction patterns,reflected in alternative use of procedural coordinationmechanisms, are likely to be reflected in differentrelationship outcomes. More sophisticated types ofinteractions might be establishing the conditions toleverage external knowledge sources, but certainlyrequire higher levels of organizational investments,which are reflected in more intensive and frequentinteractions. Similarly, outsourcing decisions mightspeed up the whole process by efficiently using exter-nal resources to subcontract part of the developmentactivity, but a lack of clarity on the goals or a mispec-ification of the initial problem might generate a costlytrial and error adjustment process. It is therefore

important to conclude this analysis by looking at theperformance implications of the use of different typesof relationships.

4.5. Relationship outcomes

Inter-organizational relationships can be activatedfor different reasons (Sobrero and Roberts, 2001).Efficiency-increasing goals are based on the assump-tion that economic activities could indifferently beorganized through internal integration or through thecombination and coordination of the work of sepa-rate economic agents, and the outsourcing decisionis cost driven. Learning-enhancing arguments, on thecontrary, focus on the characteristics of the knowl-edge being transacted. While explicit knowledge caneasily be codified and transferred among differentactors, tacit knowledge is embedded in its owner.Inter-organizational relationships therefore becomethe necessary structuring solution to overcome thedifficulties of trading knowledge-based assets, by pro-viding the opportunities to establish direct contactswith the sources of knowledge and their developmentenvironments.

To distinguish between these two possibly contrast-ing relationship outcomes, we distributed a eight-itemquestionnaire to the three Project Managers, askingthem to evaluate each supplier involved in the de-velopment project by expressing a judgment on a5-points Likert scale associated with each item. Six ofthe eight items were typical operationalization of effi-ciency such as the adherence to time, cost and qualitylevels, respect for initial agreements and the expectedlevel of competencies, and a general judgment ofsatisfaction (efficiency Cronbach’sα = 0.91). Theother two items asked whether the supplier developedsome new solutions that were used in other occasions(e.g. other product lines, other projects), and whetherthey felt they had learned something during the in-teraction (learning Cronbach’sα = 0.72). To furthersupport the results of the reliability analysis, we rana “principal components” analysis using the wholeset of items. The first two eigenvalues accounted for75% of the variance (50 and 25%, respectively). Theefficiency items all loaded strongly and positively onthe first eigenvalue (component loadings varied from0.75 to 0.93) and not on the second (component load-ings varied from−0.20 to 0.20), while the “learning”


Table 7Evaluation of relationship by type of supply: mean values and inter-group comparisons

Relationships outcome Supply type Kruskal–Wallisχ2

Traditional Integrated Advanced Black box

Efficiency 0.181 −0.455 0.993 0.246 14.411∗∗∗Learning −0.853 0.072 0.737 0.961 20.338∗∗∗

∗∗∗ P < 0.001.

items loaded strongly on the second eigenvalue (com-ponent loadings 0.85 and 0.91) but not on the first(component loadings−0.04 and 0.08).

We used the results of the “principal component”analysis to create the two output indicators. For the“efficiency” indicator, for each relationship, all theresponses to the six items described above weresummed, weighted by their corresponding componentloadings on the first eigenvalue. For the “learning”indicator, the same procedure was applied, using theother two items and their corresponding componentloadings on the second eigenvalue instead. Both indi-cators were then standardized to make between-casecomparison more meaningful and more easily inter-pretable.

Several elements of interest emerge comparingthe average standardized “efficiency” and “learning”outcome levels focusing on the type of developmentwork characterizing the interaction (Table 7). First,in both cases, there are clear differences in the out-come depending on the characteristics of the activityperformed within the relationship.

“Integrated subcontracting” parts show the low-est value, clearly indicating an impact on the finaloutcome of the relationship of the repetitive inter-action patterns highlighted before, mainly generatedby the need to correct through trial-and-error pro-cesses the problems generated by initial mispeci-fications. On the contrary, relationships based on“advanced subcontracting” parts and “black box”parts are characterized by above average levels ofefficiency, showing a more appropriate combination ofthe type of activity performed by the partners and theorganization of their interaction.

The leverage of supplier competencies is bestachieved for “advanced subcontracting” parts, whenthe knowledge specificity associated with the designof the new solution suggests granting complete free-dom to the partner involved, but the limited need of

integration of the component in the overall projectdoes not require particular investments in the designof its interface. On the contrary, these specific designrequirement lower on average the overall efficiency ofinteraction focused on “black box” parts, where theinteraction must be more intense to co-ordinate theintegration of the subsystem in the product archi-tecture, requiring specific joint efforts in the designand problem solving activities dedicated to the def-inition of the technical interface. Average levels ofefficiency result from interactions on “traditionalsubcontracting” parts, where suppliers’ contributionsare reflected in asymmetric cost structures. Whilethere seem to be some opportunities to benefit fromthe cost advantages provided by external partners inthe engineering phase of the development process,the internalization of the detailed definition of com-ponents design specifications clearly limit the oppor-tunities to compress component development costs.

The same conditions favoring higher levels of effi-ciency in the relationships outcome, however, seem tobe acting in a reverse manner towards the emergenceof learning effects. The “learning” indicators asso-ciated with the different types of relationships showincreasing values for more complex and articulatedinteractions. Suppliers’ involvement in the projectfor “traditional subcontracting” parts and “integratedsubcontracting” parts show below average or averageopportunities to foster the accumulation and transferof new knowledge through the relationship. On thecontrary, relationships with suppliers responsible for“advanced subcontracting” parts, and even more sorelationships with suppliers responsible for “blackbox” parts, provide more opportunities to stimulateinternal learning processes.

Once more, the results reflect the differentialinvestments in procedural coordination mechanisms.A higher level of involvement of external actors inthe process generate higher coordination costs, as


noted in the analysis of the “efficiency” indicator, butalso create the conditions for an effective informationtransfer process to occur. The theoretical requirementsfor facilitating the exchange of invisible assets suchas knowledge and competencies are operationalizedin specific structuring arrangements chosen to governthe interaction between the two partners. An earlierinvolvement in the project, coupled with more elab-orated communication structures and an overlappingapproach to problem solving activities are necessaryconditions to foster inter-partner learning.

These investments on the procedural coordina-tion side, however, are costly. Clearly, they are moredemanding in terms of coordination time, as well asresource allocation to the management of the relation-ship. A comparison of the trends of “efficiency” and“learning” indicators is informative in this sense. Onthe one hand, there seems to be a trade-off betweenthe two different types of outcome. On the other hand,a closer look at the data suggest that we rethink thewhole problem of inter-organizational relationshipsin new product development as a set of comple-mentary decisions involving coherent choices on thecharacteristics of the interaction and its structuringarrangements to achieve the desired outcome. Unlessthe involvement of external actors goes beyond a meresubcontracting of part of the development process, anypotential effect can at best be limited to a partial reduc-tion of overall development cost. Yet it can also gen-erate severe sources of inefficiency if the nature of thegeneral definition of the problem solving domain can-not be effectively approached using internal resources.

More articulated types of relationships, on the con-trary, offer the opportunity for limiting these risks bya proper allocation of the design responsibilities tothe owner of the relevant knowledge. The apparentlyhigher coordination costs faced during the project tostructure and manage these relationships are compen-sated in the end by the avoidance of negative loopsgenerated by initially weak definitions of the problemto be solved, and by the emergence of opportunities togenerate variance in the internal resource set with theexposure to new ideas and solutions. Initially greaterinvestments are therefore to be compared to the pos-sible alternatives focusing on the characteristics ofthe information exchange process that will emergefrom the use of different procedural coordinationmechanisms.

5. Conclusions

This paper contributes to the debate on the analysisof inter-organizational relationships in the develop-ment of innovations with the recomposition of institu-tional decisions driving the governance of inter-firmrelations and their organizational implementation.Building on previous works in economics, strategyand organizational design, the framework developedconsiders as fundamental elements for the effective-ness of inter-firm relations both status variables (e.g.determinants of cooperation) and process variables(e.g. procedural mechanisms to coordinate the rela-tion). It links inter-organizational structures to thenature of the task being performed and articulatessuch structures into contractual and procedural co-ordination mechanisms, distinguishing between theinstitutional definition of the legal boundaries of thetransaction, and the information transfer mechanismsneeded to achieve an effective transfer. Finally, itshows the theoretical relevance of distinguishingbetween these two complementary dimensions toascertain the implications for individual partners’outcome of the activation of external relationships.

Using a multi-case multi-level analysis approachto the study of 50 supplier–manufacturer relationshipsin new product development, the empirical resultsshow that, indeed, the leverage on contractual coor-dination mechanisms can be fairly limited, and sowill be its impact on the relationship outcome. Onthe contrary, procedural coordination mechanismsoffer more opportunities to differentiate the struc-turing mechanisms used to manage the interactionamong the partners.

In addition to that, with different formulationsof the outcome variable, similar choices along thestructuring dimensions generate different results,depending on the characteristics of the joint problemsolving. Higher investments in procedural coordi-nation mechanisms are costly to set up and offeropportunities to pay back as long as they are used tonurture the manufacturer’s knowledge base, ratherthan merely reduce internal development costs throughsub-contracting. On the contrary, whenever short termefficiency is the goal of the interaction, suppliersshould be given full responsibilities, limiting the in-teractions with the manufacturer and its investmentsin procedural coordination mechanisms.


Several implications can be derived from theseresults for an analysis of the strategic impact ofrelational activities. First, planning and implement-ing ties and connections with other actors goes wellbeyond the definition of the contractual coordinationmechanisms chosen to govern the relation. Althoughfrequently considered as a fundamental aspect, thedefinition of the legal boundaries of the agreement isnot sufficient to obtain the desired outcome. Externalconditions such as local systems of norms and prac-tices might even question the necessity of specific in-vestments in the contractual coordination side. Whilestill a key component of the decisions over alterna-tive structuring arrangements of inter-organizationalrelations, the research presented in this paper sug-gests that manufacturers not overlook the proceduralcoordination side by placing an excessive emphasison the contractual coordination side, at the expensesof the final outcome of the relation.

Second, the impact on the performance of the ac-tors is strictly linked with the structuring decisiontaken with respect to the procedural coordinationmechanisms used to make the relationship work. Theeffect of alternative choices on how to implementthe exchange among the parties attracts the attentionto the relevance of inter-organizational structuringdecisions.

Similar structures, however, might be economicallyjustified only in certain cases, considering the coordi-nation costs associated with more articulated relationaloptions. Indeed, the empirical results show that forinvestments in relational activities to generate attrac-tive returns they need to be congruent with the type oftask jointly performed. Depending on the characteris-tics of the task at hand therefore different proceduralcoordination mechanisms can have very different im-pact on the outcome of the subjects involved. On theone hand, a pure financial evaluation based on shortterm observations of such impact might underestimatethe effect deriving from changes in the competenceset which need longer time spans to become visible.On the other hand, leaner structures might generatea positive impact on the overall cost structure of thefocal firm, but could not be exploited to affect itscompetence base.

Differences in the observed outcome of alternativeprocedural coordination mechanisms reflect their ap-propriateness to achieve different outcomes. Invest-

ments in dense and differentiated relational arrange-ments are certainly increasing the opportunities forexchanges, but the related costs are also increasing.Depending on the expected outcome therefore thechoice of the corresponding set of procedural coordi-nation mechanisms should be made accordingly.

In this paper, we have discussed how inter-organiza-tional structuring decisions can impact the innovativeoutcome of new product development projects, whilewe have not collected data on process innovation.Closer and denser interactions with suppliers, how-ever, have emerged in different studies as powerfulsources of continuous improvements also on the shopfloor. More generally, it can be argued that such op-portunities could be multiple, depending on all theopportunities that the partners have to interact. Futureresearch could be directed to mapping and assess-ing the connections between the different relationalsets activated by the partners, and the impact of suchspillovers on innovation. Finally, while we have de-cided to focus on one specific actor along the valuesystem (the manufacturer) we believe that the issuesraised in the paper could be useful and transferable allalong the chain. The well-established concept of orga-nizing suppliers in multiple level tiers, which as beenwidely explored in the automobile industry, is quicklymigrating to other industries, from aerospace topackaging machinery. Managing inter-organizationalrelationship therefore becomes a key aspect of moreadvanced approaches to the extended supply chain, re-quiring the development of specific relational capabil-ities not only at the manufacturer level, but also at thesupplier level.

Acknowledgements

Partial support from MIT Industrial Performancecenter, MIT International Center for Research on theManagement of Technology, and MURST ex-40%#9913628915-003.

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Documents

(10) Strategic Management of SupplierÔÇômanufacturer Relations in New Product Development