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Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

The determinants and effects of relational governance on IOS usage in the


manufacturer-supplier relationships

QunHong Zhang ZhenYu Liu Jing Yan


School of Management , School of Management , Fujian Administration Institute
Xia’men University Xia’men University yanjing_1107@163.com
nrisland@yahoo.com.cn zhenyliu@xmu.edu.cn

Abstract representation of the patterns of interorganizational


Managing electronic cooperation in the relationship. It is considered that the IOS structure is
manufacturer-supplier relationship is a key to equivalent to the structure of interfirm relationships.
successful development of an interorganizational A variety of studies have applied different
systems (IOS) usage, and identifying the determinants perspectives to explain the phenomena(e.g., Malone et
of relational governance is important. However, al, 1987; Zaheer and Venkatraman, 1994). Studies in
limited empirical researches have been made to the information processing approach view that
validate the effects of relational governance on IOS uncertainty and information processing are the most
usage between trading partners. From several important issures in explaining cooperation. Studies in
perspectives, We build an integrated framework, and transaction costs theory view that asset specificity is
use 2 automobile and 4 airline companies in china, considered as a primary source of uncertainty. The
124 usable responses to empirically evaluate the relational perspective offers a different, less explicit set
model. Results show that relational governance of governance mechanism to persuade suppliers to
including joint planning and joint problems solving has willingly make more transaction-specific investments.
strong association with IOS usage in terms of Relational governance in this study refer to interfirm
advantage and diversity. Furthermore, reciprocal
exchanges that include significant relationship-specific
investment in form of IT and trust between
IT, combined with a high level of interorganizational
manufacturer and supplier are proved to effective to
promote IOS usage, these two determinants of trust (Zaheer & Venkatraman, 1994). The presence of
relational governance have a moderating effect on the trust and reciprocal investments have been described as
two dimensions of IOS usage . However, important antecedents to interfirm electronic
interdependence and uncertainty are found to be not cooperation. Electronic cooperation in
effective to promote IOS usage. interorganizational relationship has been generally
Key-words: IOS, Relational governance, explained as a function of IOS, and Information
Manufacturer-supplier relationship, Reciprocal System (IS) literature has called this IOS-induced
investment; cooperation as electronic integration, electronic
interdependence, information partnership, or relational
governance. IOS is viewed as contributing to
1. Introduction
cooperation by posing IT specificity and increasing
interactions and information processing capabilities
Up to now, suppliers have used interorganizational between manufacturer and supplier.
systems (IOS), such as electronic data In this article, we will discuss the relational
interchange(EDI) or resource planning systems (ERP), governance as a mode to coordinate business
to develop more cooperative and long-lasting relationships. The determinants of relational
relationships with manufacturer. Transaction-specific governance and effects on IOS usage are then
information technology (IT) investments are those discussed on basis of several perspectives and the
investments intended to support a specific hypothesis are elaborated. The research framework is
manufacturer-supplier relationship. For example, a tested on 2 automobile and 4 airlines companies in a
supplier might invest in specialized software and sample of 124 responses. The results, discussion and
equipments to produce customized or idiosyncratic limitation are drawn.
components for a manufacturing firm. IOS is viewed as
planned and managed ventures between independent
organizations (Kumar & Dissel, 1996) and as a

978-0-7695-3450-3/09 $25.00 © 2009 IEEE 1


Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

2. Theoretical background facets of technical IOS infrastructure. Choi (2002)


proposes technological, structural, and informational
characteristics as three dimensions of inter-
2.1. Transaction cost economics perspective organizational IOS infrastructure. Khawaja (2004)
Many prior studies from transaction cost provided comprehensive conceptualization of IOS
perspective focus on whether IOS promotes characteristics (IOS integration, IOS intelligence, and
hierarchical governance mechanisms based on system modularity) and supply chain integration
intrafirm control, or market mediate mechanisms based (flexible integration, strategic integration, and
on interfirm relationships (Malone et al., 1987). Now, operational integration).
The most widely accepted study about the impacts of
IT on cooperative interorganizational relationships is 3. Conceptual framework and Hypotheses
the ‘move to the middle’ hypothesis presented by
Clemons et al.(1993). The new governance mode has In this study, we propose an indirect effect of asset
been described as value-adding partnerships, networks, specificity, dependence, trust, and uncertainty on IOS
vertical quasi-integration, or strategic alliances. IOS usage in the manufacturer-supplier relationship. The
has played a vital role in the formation of these new research model (Figure 1) proposes that asset
intermediate governance structures. According to specificity, interdependence, trust, and uncertainty are
Clemons et al., IOS has the ability to reduce not only main determinants of relational governance. The model
the coordination cost but also the operation risk and the also argues that the impact of these determinants on
opportunism risk, leading to more outsourcing, but IOS usage in term of diversity and advantage is
with fewer suppliers. mediated through relational governance.
2.2. Social-political perspective
From the social-political perspective, Factors such Determinants
as conflict, dependence, power, commitment and trust Specificity
have been widely examined in empirical studies IOS usage
analyzing the impacts of relational governance on IOS Diversity
Dependence Relational
usage. The socio-political stream argues that a firm governance
forms interfirm linkages primarily to gain control over Advantage
critical resources and thereby reduce uncertainty Trust
(Anderson & Weitz, 1989).
Studies in marketing channels research have relied Uncertainty
heavily on social exchange theory in building models
of the exchange relationship between manufacturer and Figure 1 Research Framework
supplier. According to this theory, power is regarded as 3.1. Relational governance
the most important sociological aspect of an
The relational governance does not solely rely on
interorganizational relationship when one firm needs to
the market forces or the power of fiat to coordinate the
influence another’s decisions.
relationship, but rather the governance relies on
Partnership characteristics such as behavior and
cooperation. This implies that independent but closely
climate of the relationships and product characteristics
related manufacturers or suppliers can reduce their
are also examined as important factors for electronic
range of activities and concentrate on a few core
cooperation (Beansaou, 1995).
competences. In the decision to cooperation with
2.3. IOS perspective others, relational governance reflect the degree to
IOS is defined as a set of IT resources shared which joint actions are established in a business
among organizations, which provides shared IT relationship (Bensaou & Venkatraman, 1995).
services and supports information processing and Relational governance, by definition, requires joint
communication across organizations(Broadbent et al., efforts or actions taken by independent firms to achive
1999). An IOS may be made up of various software mutual outcomes or singular outcomes (Ander and
modules or systems that support business activities. Narus, 1990). Relational governance are the bilateral
Massetti and Zmud (1996) propose that EDI use is a expectations that exchange partners will act in ways
multidimensional construct including volume, breadth, that assist each other during the course of the
diversity, and depth dimensions. Byrd and relationship. Relational governance exists in an
Turner(2000) propose connectivity, compatibility, interfirm context when the exchange partners use
application modularity, and data transparency, as four

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Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

relational norms and/or expectations of continuity to support this assertion by finding positive association
regulate opportunism. between asset specificity and certain aspects of
Joint action between a manufacturer and its relational governance such as joint actions. Based on
supplier provides sources of competitive advantage in the theoretical reasoning and empirical findings, we
downstream channels. A supplier can obtain better formulate the following hypothesis:
intelligence about manufacturer requirements and H1: The greater the interfirm’s asset specificity, the
competitors’ moves through intensive joint action. Two greater the relational governance in the manufacturer-
joint actions appear to be central to relational supplier relationship.
governance, joint planning and joint problems solving Interdependence
(Dyer and Singh, 1998). Joint planning allows mutual Interdependence is a crucial concept in marketing
expectations to be previously established and channel research. Channel researchers have often
cooperative efforts to be specified ex ante, while derived their definitions of dependence from Emerson
through joint problem solving, a mutual satisfactory conceptualization of power-dependence theory. Each
solution may be reached. Joint action represents a party’s dependence on its partner is determined by (1)
novel and attractive alternative to traditional its motivation investment in the relationship, and (2)
governance norms. Relational governance may absorb the replaceability of the partner. Kumar et al.(1996)
the environmental instability through joint planning argued that a comprehensive view of the channel
and problem solving. Manufacturer and supplier may interdependence structure must include total
employ relational governance in order to manage interdependence and interdependence asymmetry.
environmental uncertainty. Wilson and Viosky(1997) Interdependence is critical for promoting cooperation
proposes joint undertaking of planning and scheduling and adaptation in relational exchange and a key
activities, joint ownership of the master production contributor to partner commitment (Morgan and Hunt,
schedule, adherence to manufacturing plans, and 1994). By fostering interdependence between
visibility of information as operational depictions of exchange partners, exchange relationships create the
relational governance. Relational governance in this scope for opportunism. Dependence is defined as a
study is described as the extent to which firms in the firm’s need to maintain a relationship to achieve to
manufacturer-supplier relationship take coordinated achieve common desired goals, and it is chosen as a
actions so as to achieve mutual outcomes. Joint action major determinant of relational governance and a vital
is defined as the extent to which manufacturers and construct for understanding interfirm relationships.
suppliers work together toward their respective or Practically, a firm’s dependence on its exchange
common goals. partner is a necessary condition for relational exchange.
3.2. Determinants of relational governance Join action is likely to be most intensive when both a
manufacturer and a supplier are highly dependent on
From transaction cost and socio-dependence each other. One dependence-balancing mechanism for
perspective, factors such as asset specificity, a manufacturer is to engage in intensive joint action
interdependence, trust, and uncertainty, have been with its supplier to increase the supplier’s motivation
widely examined in empirical studies analyzing the investment in goals mediated by the manufacturer,
determinants of relational governance. thereby increasing supplier dependence on the
Asset specificity manufacturer. As joint action increases, each firm is
In the context of interfirm dyadic relationships, likely to treat the other firm as an important business
asset specificity can be described as the extent to which partner, interdependence is likely to be balanced, and
the value of a firm’s capital is specific to the transaction benefits will be enhanced. The various
relationship with the other firm. Examples of elements of the channel interdependence structure can
manufacturer-specific assets include(1) manufacturer have diverse effects on the member’s attitudes and
investment in training of its own and/or the supplier’s behavior. We posit that interdependence will have
personnel and (2) manufacturer installation of tools and negative effect on relational governance.
equipment, production, and/or logistics processes. H2: The greater interdependence between
Reciprocal investments refer to transaction-specific manufacturer and supplier, the lower the relational
investments made by one partying an exchange governance.
relationship, and can be considered as safeguarding its Trust
investments in transaction-specific assets. Reciprocal Trust is another aspect of interfirm exchange
investments made by a firm tend to promote a long- relation relationship, which can be viewed as one
term and stable relationship with its business partner in party’s confidence in the reliability and integrity of an
an exchange relationship by encouraging to increase exchange partner. TCE (Transaction Cost Economics)
the level of cooperation. Prior empirical studies contends that trust is a key relational characteristic to

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Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

build long-terms relationship. In the current context, In IOS literature, most studies use EDI as a
trust refers to the manufacturer’s expectation that the measure of IOS use. Hart and Saunders(1997)
supplier will act to benefit the manufacturer’s interests measured EDI use along two dimension: volume and
regardless of the manufacture’s ability to monitor such diversity of transaction, and showed that inter-firm
behavior(Anderson & Weitz, 1989). The presence of trust fosters more effective EDI use, however, supplier
trust in relational governance is a basic concept(Zaheer power does not increase the EDI use. Bensaou and
& Venkatraman, 1995). Defining in a broad sense, trust Venkatraman(1995) proposed that intensity of EDI use
reflects the extent to which negotiations are fair and comprises of two dimensions: exchange of a wide
commitments are sustained and a party’s belief that its range of documents and ability to support interaction
requirements will be fulfilled through future actions across various functional areas. Masseti and Zmud
undertaken by the other party (Anderson & Weitz, (1996) proposed that EDI use is a multi dimensional
1989). We argue that perceived trust will lead trading construct: advantage, breadth, diversity, and depth. In
partners to have a more cooperative relationship. according with prior studies on dyadic EDI usage in
H3: The greater the trust, the greater the relational interfirm relationship, we particularly focus on the two
governance in the manufacturer-supplier relationship. dimensions of advantage and diversity that many firms
Uncertainty are concerned with when developing an EDI network
According to TCT, uncertainty is another key factor with their partners. EDI diversity refers to the extent to
to consider in formulating governance decisions. which different types of EDI document sets are
Defined as the inability to predict partner behavior or exchanged between trading partners. IOS advantage
changes in the external environment, uncertainty gives can be described as the benefit is acquired through
rise to an adaptation problem. Environment uncertainty IOS. IOS can lead to order response time reductions,
increases information asymmetry and encourages facilitate better inventory control, and provide timely
exchanger to behave opportunistically. The and accurate information for decision making.
uncertainty is derived from the construct of Integrated IOS also provide the underlying
environmental instability that refers to the volatility infrastructure that enhances the ability of firms to
and diversity of the market, customer preference, effectively manage non-routine events and
customer demand and competitors. However, prior emergencies. With respect to the main effects of
theoretical and empirical studies do not provide a cooperation in the interfirm relationship on the level of
consensus on the nature of the relationship between EDI usage, we formally construct the following
uncertainty and relational governance. Sutcliffe and hypotheses:
Zaheer (1998) offered a useful framework to study the H5-1: Relational governance is positive effect on
role of uncertainty in governance choice by classifying IOS usage in terms of advantage.
it into three distinct forms: primary uncertainty, H5-2: Relational governance is positive effect on
competitive uncertainty, and partnership uncertainty. In IOS usage in terms of diversity.
this study partnership uncertainty could be particularly
important in the manufacturer-supplier relationship. A 4. Research Methodology
manufacturer experiences decision-making uncertainty
about its supplier when the manufacturer is unable to
predict supplier performance on key variables like 4.1. Data collection and sample
price, delivery, and adaptability. With uncertainty, a Since the study was an explaratory research, some
manufacturer is expected to seek flexibility in its typical cases were selected, including 2 medium and
exchange relationships to cope with future conditions.
small scale automobile companies and 4 airline
Then we postulate that a manufacturer or supplier
companies. Data were collected through email or face
facing a high level of uncertainty from its trading
to face interview with IT managers. 200 questionaires
partner will not be motivated to cooperate.
were sent out, total number of responses is 132, and
H4: The greater the uncertainty, the lower the number of usabe is 124. Responses in 2 automobile
relational governance in manufacturer-supplier companies are 21, 17 respectively, and in 4 airline
relationship.
companies are 27, 16, 31, 12 respectively.
3.3. IOS usage 4.2. Operational Measurement
There are many IOS usage. Electronic Data We began the instrument development process with
Interexchange (EDI) is the most popular IOS
a search for prior studies that contained scales for the
system( Croom, 2005). EDI provides a common
constructs used in our study. Since existing scales that
platform for the exchange of business documents and
were proven to be reliable and valid measures were
other systems used by organization.
available for most of the constructs, we adapted them

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Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

for this study. All latent constructs were measured with interdependence and uncertainty is high (0.76), for that
multiple items on seven-point Likert Scales, ranging the more uncertain of environment, the more
from 1 (strongly disagree) to 7 (strongly agree). The interdependence between manufacturer and supplier is
Appendix lists the operational items and the sources necessary.
we used for each construct. Table1 Reliabilities and Item loadings
item Loading Eigen Variance Cronbach’s
value Extracted ¢
5. Data analysis Asset specificity
q1 0.662*
We evaluated the validity and reliability analysis q2 0.703* 0.87
using SPSS 13.0 and the measurement model by means q3 0.843 2.345 67.58%
of a confirmatory factor analysis (CFA) using AMOS q4 0.692*
Dependence
5.0. AMOS is an acronym for “Analysis of Moment
Structures”, which allows researchers to simply q5 0.891*
q6 0.709* 3.121 46.28% 0.89
instruct the program to draw the hypothesized model
for evaluation. q7 0.817*
Trust
5.1 Validity and reliability analysis
q8 0.729*
The analyses have been conducted in multiple q9 0.769* 1.781 53.59% 0.79
stages such that results from these can collectively help q10 0.643*
assess the proposed framework and hypotheses. When q11 0.847
multiple-item scales are used to measure latent Uncertainty
constructs and a composite score based on these items q12 0.692*
is used in further analyses, it is important to assess the q13 0.410* 2.014 62.41% 0.62
validity and reliability of the scales used. Table 1 q14 0.789*
provides the results of validity and reliability analysis. q15 0.722*
Table1 displays the composite reliability scores for Relational governance
each of the seven constructs. Composite reliability is q16 0.809*
similar to Cronbach’s alpha ( ¢ ), and reflects the q17 0.829* 2.098 39.31% 0.91
internal consistency of the indicators measuring each q18 0.845
q19 0.357*
construct. Results show that all seven constructs have q20 0.846*
composite reliability scores greater than or near to the IOS Diversity
commonly recommended 0.7 benchmark, exhibiting an q21 0.762*
acceptable level of internal consistency. q22 0.802* 1.198 59.11% 0.85
Convergent validity ( i.e. the degree of association q23 0.756*
between measures of a construct ) was assessed by q24 0.874*
reviewing the significance for the factor loadings. As IOS Advantage
shown in table1, most factor loading are larger than q25 0.881*
q26 0.812* 1.562 60.23% 0.72
0.6, except item q13 and q19, the factor loading of
q27 0.798*
which is 0.410 and 0.357. The p value of item q3
* indicates significance at p<0.005
(p=0.213), q11 (p=0.038) and q18 (p=0.019) are not
Table 2 Construct correlation Matrix
significant. These five items will be ignored in the
structural equation model. The eigenvalue and variance SPE DEP TRU UNC REL DIV ADV
extracted for a latent construct were computed for each
multiple indicator construct in the model. The variance Specificity 1.00
extracted values all exceeded 0.50, and the eigenvalue Dependence 0.44* 1.00
is greater than 1, which are the acceptable values.
Discriminant validity (i.e. the degree to which Trust 0.67* 0.58* 1.00
items of constructs are distinct) can be empirically Uncertainty 0.62* 0.76* 0.65* 1.00
assessed in a weak sense by using the confidence
Relational 0.71* 0.49* 0.59* 0.67* 1.00
interval test (the inter-factor correction between two
constructs). The corrections among all the constructs Diversity 0.50* 0.48* 0.64* 0.41* 0.49* 1.00
are presented in Table2, the correction coefficient is
Advantage 0.55* 0.44* 0.47*. 0.69* 0.70* 0.42* 1.00
lower than 0.80. As a result, this confidence interval
test lends support to the discriminant validity of the
studied constructs. The correction coefficient between

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Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

5.2 Model fit measurement


q21 q22 q23 q24
Fit indices included in the present study are listed
in talbe4. The value of ·2/df ( Chi-square/ degrees of 0.82* 0.80* 0.73* 0.85*
freedom, 2.743) is below than the threshold value of 3.
Values greater than or near to 0.9 are desirable for GFI q1 0.64* IOS
(Goodness-of-Fit Index, 0.889) and AGFI (Adjusted q2 * Diversity
0.69* Asset
Goodness-of-Fit Index, 0.936), and values greater than q4 0.72* Specificity
or near to 0.8 are desirable for CFI (Comparative fit
index, 0.861) and NFI (Normed fit index, 0.794). 0.69*
Moreover, a value smaller than 0.1 is acceptable for q5 0.88* 0.65*
RMSEA (Root Mean Square Error of Approximation, q6 0.70* Dependence
0.084). The results show that the model reaches a q7 0.84*
reasonable goodness of fit.
Table 3 Model fit Measurement -0.35*
0.78* q16
Ð2/df GFI AGFI CFI NFI RMSEA 0.52* Relational 0.83* q17
q8 0.70* governance
2.743 0.889 0.936 0.861 0.794 0.084 0.80* q20
q9 0.82* Trust 0.72*
q10 0.61*
5.3 Analysis Results -0.41
IOS
Structure equation model analysis using Amos 5.0 Advantage
is used to investigate whether the determinants of q12 0.77**
relational governance influence IOS usage. Figure 2 Uncertainty 0.89** 0.79* 0.82*
q14 0.81*
shows the results of the structural model estimation
including standardized path coefficients, and q15 0.72* q25 q26 q27
significance for directional hypotheses. Reciprocal
asset investments have positive association with **significant at p<0.005, * significant at p<0.01.
relational governance (£=0.69). Trust also positively Figure2 Effect of relational governance on IOS usage
impacts relational governance(£=0.52). Based on the
significance of the path coefficients, H1 and H2 are
6. Conclusion, discussion and limitation
supported. However, interdependence between
manufacturer and supplier has negative effect on
relational governance (£=-0.35), in accord with the Based on several perspectives, the paper explored
the determinants and effects of relational governance
H2 . Uncertainty has no significant impact on relational
on IOS usage by empirical study. The results indicate
governance, the significant is higher than 0.05, so H4
that transaction-specific investments, trust, have strong
cannot be supported. Relational governance has
effects on electronic cooperation in the manufacturer-
positive effect on IOS usage in term of diversity(£
supplier relationship, which in turn increases the level
=0.65) and advantage(£=0.72). The coefficients and of electronic coordination via EDI. Relational
significance support H5-1 and H5-2. governance enhances the IOS usage between
manufacturer and supplier, and the determinants of
relational governance have indirect on the IOS usage.
The results also offer reciprocal special investments in
the form of IOS-usage, which is the most effective
strategy. As expected, our results show that joint
action between manufacturer and supplier is
significantly and positive related to two dimensions of
IOS usage. Combined with the significant association
between relational governance and its determinants
(asset specificity, trust, and interdependence) discussed
above, these findings corroborate our assertion that
these relational factors have indirect effects through an
intervening variable, relational governance, on the two
dimensions of IOS usage.

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Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009

The empirical test finds a significant negative


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Appendix survey instrument


Construct and measure items Reference source
Asset specificity Claro &Hagelaar
q1:Our company has made investments in resource dedicate to the relationship. (2003);
q2:Our operating process has been tailored to meet the requirement of dealing. Joshi & Stump(1999)
q3:The procedures/routines we have developed are tailored to their particular situation.
q4:Training our people has involved substantial commitments of time and money.
Dependence Das & Teng(2000);
q5: Our company can benefit greater in the relationship than act alone.
q6: Our company and supplier face with mutual business opportunity or threat.
q7: Our company and supplier share key resource and technology.
Trust Dyer & Singh(1998);
q8: We expect supplier to be working with us for a long time. Morgan & Hunt(1999);
q9: There is close, person interaction between the partners
q10: The relationship among partners is characterized by high reciprocity.
q11: The relationship among partners is characterized by mutual trust.
Uncertainty Joshi & Compbell(2003);
q 12: Customer preferences are continually evolving in our industry. Joshi & Stump(1999)
q 13: Customer demand for our product varies continuously.
q14: Our major competitors are continually introducing new products to the market.
q 15: Our major competitors are continually devising new selling strategies.
Relational governance Joshi & Stump(1988);
q16: We rely on our mutual understanding with supplier to assign role of each other. Claro & Hagelaar (2003);
q17: We manage unexpected events by rely on our mutual understanding with the supplier. Zaheer(1995)
q18: We rely on mutual understanding of continued business to resolve problems.
q19: Our company shares long-term plans of our products with this buyer.
q 20: Our company and supplier are committed to improvements that may benefit each other.
IOS Diversity Hart & Saunders(1998)
q25: A variety of data types.
q26: A variety of data formats in each data type.
q27: a variety of database and protocols.
IOS advantage Premkumar &
q 21: Using IOS reduces order response time. Ramamurthy
q 22: Using IOS cuts cost in operations, and facilitates better inventory control. (1995)
q 23: Using IOS provides timely and accurate information for decision making.
q24: Using IOS aids in service differentiation.