My Failure, Our Failure: When Do Firms Fire Suppliers?

Interorganizational networks can be many things, but one of the most consequential is made up of the exchange ties that follow components downstream to a firm that assembles the final product. These ties are consequential for many, because the component makers and final product assembler all rely on the cost and quality of the components, and so do the final users. Having a familiar component supplier is wonderful because “tried and true” testifies to quality, so any signs of failure in existing components is a small crisis for the assembler. This situation is also interesting to researchers because it shows how organizations make important choices.

What better place to study it than in Formula 1 racing car assembly, as David R. Clough and Henning Piezunka did in a paper published in Administrative Science Quarterly? Their study gives an interesting and surprising answer to how firms decide when to fire component makers. Firms look to the performance of their own product, which is expected, but also to the performance of competitors’ products using the same component. And here is where the research findings get surprising. If competitors using the same component are also doing poorly, the firm will stop using the “tried and true” component and switch to another supplier. Shared fate with the competitors does not make firms complacent but rather makes them more eager to improve.

Why does this happen, and especially in a race where the whole point is to do better than the competitor? If many cars slow down, your car is not slowing down more than many others. The key is that firms learn vicariously from each other, and they can be very objective in assessing their options when the stakes are high. A competitor’s car doing poorly when holding a shared component is already a warning sign that could lead a firm to drop the component from its own car, and if the firm’s own car is also doing poorly the warning gets louder. Firms learn from their own experience, learn vicariously from the experience of others, and put the two forms of learning together to make difficult choices such as replacing a key component made by a familiar supplier.

In business, interorganizational ties such as supplier–buyer relations are important because they help build trust and reputations for responsiveness when problems occur. In the end, however, what matters more is the actual quality, and then a different kind of tie may be just as effective: buyers compare themselves with each other and use the information to assess the supplier. Performance matters more than trust.

Clough, D. R., & Piezunka, H. Tie Dissolution in Market Networks: A Theory of Vicarious Performance Feedback. Administrative Science Quarterly, forthcoming.
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