Cognitive and Structural Embeddedness of the Supply Base: Effects on Buyer Profitability

Recent supply chain operations studies have made strides in understanding the structural and relational embeddedness of firms in the supply base and their impact on the performance of the focal buyer. Yet, the theory on cognitive and cultural embeddedness remains unclear. Understandably, cognitive and cultural embeddedness of firms are less observable. Indeed, cognitive and cultural embeddedness explains the deep motivations of firms’ actions - why firms do certain things and why they pursue certain kinds of relationships in the first place. This study takes an incremental step in this direction. We propose and empirically examine the relationships between shared cognition among firms in a supply base and the financial performance of the focal buying firm. Through analysis of a sample of 240 ego-networks of buying firms, our overall theoretical argument is supported, and we find a nuanced understanding of how such network-shared cognition functions. More specifically, in a supply base, cognition shared among a buyer and suppliers is positively associated with the buyer’s financial performance (ROA). However, when the network becomes cognitively homogeneous, it has a detrimental effect on the buyer’s financial performance, revealing the “dark side” of cognitive embeddedness. We also identified the moderating effect of network interconnectedness, which allows the buyer to benefit from suppliers’ network shared cognition. That is, only in the presence of a very interconnected network, the potential benefits from supplier-supplier shared cognition will materialize for the buyer; otherwise, its potential remains dormant.