Contingency role of a Supplier's operational efficiency in the customer relationship – performance links

Purpose Extant studies on the relational capital—performance benefits in buyer–supplier relationships (BSRs) give limited attention to the value of internal resources/capabilities possessed by each party, thus imply the universal benefits of relational capital regardless of a party's own abilities. To fill this gap in the literature, this paper aims to investigate whether and how a firm's operational efficiency moderates the relation between its relational ties with the largest customer and its performance outcomes. Design/methodology/approach This study employs a large panel data of US public firms and their major customer relationships for the period of 1980–2018 from Compustat and a two-stage least square regression to address endogeneity concerns. Findings The authors find that suppliers achieve different performance benefits and disbenefits from their relational ties with major customers depending on their own operational efficiency. Specifically, strong suppliers achieve higher market share and lower profitability as relational ties with major customers increase. In contrast, weak suppliers who develop high levels of relational ties with their major customers tend to increase their profit-generating potential, yet their market share declines. Thus, the findings suggest that suppliers make different trade-offs between profit enhancement and pie expansion depending on their operational efficiency. Research limitations/implications As a secondary data study, this research relies on proxy measures to capture relational ties in BSRs. Although the validity of the proxy measures are well established in the literature, additional primary information on sample firms and their relationships may be able to identify other types of internal and external resources and capabilities that can be leveraged as relational capital. Practical implications Relational ties with major customers entail both relational capital and relational liabilities. Strong suppliers trade off their profit-maximizing potential for the pie expansion opportunity via sales growth to major customers. On the other hand, weak suppliers achieve higher profits from relational ties with major customers, but this benefit comes at the expense of pie expansion due to decreasing sales to major customers. Managers should be aware of performance trade-offs between profit enhancement and pie expansion depending on a firm's internal capabilities and carefully choose to develop and exploit relationship-based assets with customers depending on their performance goals. Originality/value The contrasting performance outcomes demonstrated by strong and weak suppliers in this study challenge the prevailing assumption about the broad performance benefits of relational ties in BSRs. To the best of the authors’ knowledge, this research is the first to empirically substantiate the contingency role of suppliers' operational efficiency in the relational capital—performance link.