Developing strategic supplier networks: An institutional perspective

Developing strategic supplier networks: An institutional perspective

Journal of Business Research 66 (2013) 506–515 Contents lists available at SciVerse ScienceDirect Journal of Business Research Developing strategic...

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Journal of Business Research 66 (2013) 506–515

Contents lists available at SciVerse ScienceDirect

Journal of Business Research

Developing strategic supplier networks: An institutional perspective Seyda Deligonul a, Ulf Elg b, Erin Cavusgil c, Pervez N. Ghauri d,⁎ a

St. John Fisher College, USA Lund University, Sweden c University of Michigan-Flint, USA d King's College London, Department of Management, 150 Stamford Street, London SE1 9NH, United Kingdom b

a r t i c l e

i n f o

Article history: Received 1 April 2011 Received in revised form 1 October 2011 Accepted 1 December 2011 Available online 29 December 2011 Keywords: Socialization Global strategy Supplier relationships Supplier network Institutional theory IKEA

a b s t r a c t This study examines the exposure of the members of supplier networks to two layers of social influences. First, as the network connects an actor to a foreign constellation, the actor faces influences of a global character. Second, each individual actor experiences different forces emanating from its indigenous institutional environment. The exposure to two institutional practices presents a conundrum for each network member. In this duality they alter their behavior in order to resolve the contrast and clashes of layered forces. By drawing upon institutional theory and in-depth study of a global retailer, IKEA, this study shows how the retailer handles this duality. The study increases understanding of how a supplier network can be socially transformed into an idiosyncratic asset which is costly to imitate for rivals and thus offers a unique competitive advantage to the firm. The framing which is used for IKEA's strategy under institutional theory in this article underscores the regulative, cognitive, and normative socialization as part of a company's strategic process to align relationships with its partners. © 2012 Elsevier Inc. All rights reserved.

1. Introduction Many studies stress the role of inter-firm relationships and sourcing networks in global competition (Andersen & Christensen, 2005; Buckley & Ghauri, 2004). With the increased importance of an international supplier base, global suppliers play a critical role in the internal institutional system (indigenous system) embedded in a foreign one (international system). Such a role requires special relationships that are based upon commitment and in-depth understanding of the duality in practice. In this respect, legal requirements and the economic environment influence the nature of relationships in the local setting, parallel to the consideration of actors and forces in the international setting (Dacin, Kostova, & Roth, 2008). This study focuses on how a global supply chain can manage these multi-tier forces to institute a balance by using social transformation as a strategic lever. The balance is particularly curious given the conclusion by Garud, Jain, and Kumaraswamy (2002, p. 210) that institutionalization is “messy, manipulative, instrumental, conscious, and devious.” In this article, the institutional perspective is deliberately chosen and further developed to allow us to analyze the mechanisms and forces that shape the mutual understanding and commitment to relationships for all members in the IKEA's network. At the global scale, a supply chain network connects a player to foreign constellations outside of its indigenous institutional environment. The exposure to two institutional contexts – familiar and ⁎ Corresponding author. E-mail address: [email protected] (P.N. Ghauri). 0148-2963/$ – see front matter © 2012 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2011.12.003

unfamiliar – presents a compliance challenge for each network member (Spekman, Isabella, & MacAvoy, 2000). Each actor in the network operates with other's rules, while subjected to rules of its own. The duality of expediency to two sets of requirements creates power struggles and clashes of accepted practices (Brito, 2001) and often strains the relationship in a network. At the face of this complexity, the key question is how a firm aligns its global supplier network in an integrated and consistent strategy. By focusing on social adaptation as a unique competitive asset, this study examines how such transformation can be proactively built and maintained on an institutional infrastructure while the company marshals its suppliers in a particular direction. IKEA provides a rigorous working laboratory to this end as an integrated home products company which sells flat pack furniture and accessories around the world (e.g., Baraldi, 2008; Baraldi & Waluszewski, 2007; Torekull, 1996). Previous research on distribution channels (Coughlan, El-Ansary, Anderson, & Stern, 2006; Frazier, 1999; Gaski, 1984; Pelton, Strutton, & Lupkin, 1997) and the network perspective (Ford, 1998; Hadjikhani, Lee, & Ghauri, 2008) discuss the operational performance of inter-firm relationships regarding norms, power and social exchange. Furthermore, Barney (1986) discusses how a firm creates a competitive advantage through control of its strategic factor markets. However, lacking in this stream of research are investigations of structure and processes where norms and values come to fruition to actively support a company's strategy for bridging the social and cultural inconsistencies. An institutional approach can serve this purpose by offering a framework that an integrated supply chain balances various institutional forces and turns them into a powerful asset to sustain competitive advantage, which is difficult for rivals to imitate (Oliver, 1997).

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The present study contributes to existing literature by applying a unique perspective in explaining how supplier relationships can support a firm's global strategy. With the institutional approach, this study fills the gap in earlier works that emphasize the functional and operational aspects and thereby downplay the role of supplier constellation in institutional compatibility. Specifically, scholars tend to emphasize supplier relationship under purchasing strategies and not under competitive strategies (Crespin-Mazet & Ghauri, 2007). With the exclusion of the strategic perspective, the institutional forces often vanish or at best become stylized to a simple problem of control in operational context. Instead, this study presents a model where the supplier network engages in both development and sustainability of competitive strategy under challenges that are beyond the operational level. The operational control structures address efficiency issues but as Grewal and Dharwadkar (2002) state they miss the significance of socio-political processes, conflicts and commitments in influencing partner attitudes. Especially worthy of note is that these authors underscore the incomplete examination in alternative streams of research, where the analysis is typically limited to a relational economy with decision-analytic focus. In contrast, our investigation, by bringing a social developmental view, frames IKEA's strategy and market positioning as not only an economic issue, but also a social orientation with long term commitments. This study shows how supplier relationships develop in order to provide a sustainable strategic advantage. The discussion here identifies a set of critical factors that explain this process and present a theoretical framework (Greenwood & Hinings, 1996; Kraatz & Zajac, 1996; Scott, 2001). In addition to an in-depth study of IKEA and its supplier relationships with selected companies in Poland and Russia, our presentation, utilizing IKEA, looks into a hub-and-spoke framework of relationships where two organizational fields – domestic and international – are coordinated at the hub (IKEA's headquarters). IKEA is an appropriate firm to study as it is widely considered a successful global benchmark with its unique integration and successful adaptation of its internal market to external players over the firm's unique business system (Elg, Ghauri, & Tarnovskaya, 2008; Jaworski, Ajay, & Sahay, 2000; Kumar, 1997). For this study we conducted face-to-face interviews with IKEA executives and with suppliers in Russia and Poland. The choice of IKEA is deliberate since the firm represents one unique case of successful social transformation examples in the global network scene. By selecting IKEA and putting its strategic supplier network under a qualitative lens, this article addresses IKEA's special business practice and delves its useful idiosyncratic details that are important for its success. 1.1. Theoretical background Institutional theory directs attention to forces that emanate from the domain of social processes (e.g. Scott, 2001). A firm's strategic actions may not be free possibilities determined solely by economic arrangements, but can be regarded as a choice among a narrowly defined set of legitimate options determined socially within the organizational field (cf. Scott, 2001). According to DiMaggio and Powell (1983), an organizational field is a set of actors and practices that constitute an area of institutional venue. The venue may include key suppliers, consumers and regulatory agencies. Organizational fields are quite often deeply established and highly structured (Ranson, Hinings, & Greenwood, 1980) under norms and behavior of organizational actors with different roles. With the rooting of the organizational field, boundaries are formed and players are exposed to new actors as well as to societal norms as an alternative to the prevailing ones (Cavusgil, Knight, & Riesenberger, 2008). The shaping of a particular organizational field is to a large extent based upon the focal firm's key values and core strategy. An investigation into this process and how it can be managed can further our understanding of how to build a strong position in foreign markets.

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The perspective of generating pressures toward similar practices is an important tenet in institutional theory. Additionally, institutional forces act on firms and compel them to seek legitimacy. According to Suchman (1995), a field can offer three types of legitimacy; pragmatic legitimacy results when the firm's behavior corresponds to a self-interest calculation of its most immediate audience in the field; moral legitimacy refers to the normative evaluation of the firm and whether it is considered to do the right things by the wider public; cognitive legitimacy concerns whether its activities are comprehensible and correspond with the larger belief system and the experienced reality within the field. In line with theoretical expectation, empirical studies have typically affirmed the increase of homogeneity of organizational fields under institutional development (Kraatz & Zajac, 1996). At IKEA too, the process of isomorphing (homogenization with mimetic, normative, and coercive forms) and legitimization are exploited for the benefit of the entire system, both upstream and downstream, by attempting to diffuse the necessary conditions that will promote the firm's strategic intentions (Yeniyurt, Townsend, Cavusgil, & Ghauri, 2009). Institutional influences on organizational behavior take three forms. In Scott's (2001) words, these three pillars stand on the regulative, the normative, and the cognitive influences. Jointly, the three pillars are critical in answering three questions. The regulatory influences establish the norms for self-interest and resulting clashes; normative influences structure the expectations from the members of the organizational field; and cognitive influences address the interpretational integrity to tune up the behavior in the organizational field. These three pillars affect the firm's actions by shaping, endorsing, mediating, and channeling the institutional environment. According to Barringer and Harrison (2000), inter-organizational research applies institutional theory by discussing how external relationships are useful as a response to environmental pressures and as a vehicle for increasing a firm's legitimacy and for governing relationships. Hitt, Ahlstrom, Dacin, Levitas, and Svobodina (2004) discuss alliances and institutional theory with a focus upon how the external, institutional environment affects the choice of a firm's alliance partners in Russia and China. They conclude that a more stable external environment makes it possible for Chinese firms to have a long term perspective on their alliances and the benefits they can generate. Dacin, Oliver, and Roy (2007) show how alliances can provide organizations with legitimacy as a specific benefit. According to Dacin et al. (2007) legitimacy ensures economic and competitive goals as well as effective governance, and it provides the rationale for firms to enter into alliances. Noorderhaven (1995) points to institutionalization and without empirical support recognizes its function in developing discrete market transactions into long-term buyer–seller relationships based upon commitment and a restraint from opportunism. McDermott and Corredoira (2010) show that suppliers from emerging markets can upgrade their products and processes and increase their competitiveness through in-depth, institutionalized relationships with foreign MNEs. Brito (2001) develops an institutional approach for analyzing collective actions in industrial networks. The main focus is on how a group of actors develop institutional relationships that can support their own interests within the broader network. Andersen, Christensen, and Damgaard (2009) apply Scott's (2001) three institutional pillars and discuss how their institutional environments influence firms from different parts of the world and how this influence shapes their expectations within inter-firm relationships. They argue that the legal, regulative and cognitive pillars in society can influence norms and expectations within buyer–seller relationships. While these studies substantially contribute to our understanding of how institutional theory may be applied to supplier relationships, they devote a limited interest to the institutionalization process taking place within single alliances and how it can shape shared norms and interpretations.

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Often studies based on an institutional perspective focus on the conditions of the organizational field, and specify the associated guiding institutions. The discussion often proceeds to the resultant requirement for instituting legitimization and finally to isomorphism. Also, the discussion looks at inertia to change. In institutionalism, the question of how the Scott's three pillars evolve and change given the interaction patterns and power balances among the members takes the center stage (e.g., Greenwood & Hinings, 1996). While scholars recognize that social norms develop within a broader institutional context (Achrol, 1997; Anderson & Narus, 1990; Grewal & Dharwadkar, 2002; Heide & John, 1992), they have devoted less attention to the development of the three pillars of institutional environment. Disagreement occurs in the literature regarding how the three pillars of institutions might evolve and transform. Scott (2001) conjures the regulative, normative, and cognitive institutional pillars as analytically independent and self-contained. Co-evolution or interaction would not be expected. In contrast, Hirsch and Lounsbury (1997) assert that the institutional pillars are not analytically and operationally distinct but rather, overlapping, so that development of one pillar will influence the development of other pillars. Our analysis sheds some light on the debate. All in all, existing theory provides a preliminary, basic understanding of the research problem. For the firm to gain a competitive advantage, it has to understand and deal with the unique institutional forces at work. The first step is to identify significant factors that have an important influence on the firm's strategic activities and understand their roles. These can include business partners and customers as well as societal actors. Secondly, in order to be accepted by critical actors, the firm needs to entrench itself as a legitimate player in the market. Legitimacy can be pragmatic if the firm promotes the self-interest of other players, moral if it appears to do the right things and cognitive if the activities are in concert with prevailing beliefs and norms concerning how things should be done. The higher the firm's legitimacy standing, the more capacity the firm has to influence other actors and manipulate the regulative, normative and/or cognitive pillar of behavior in line with its strategic intent. This approach is likely to be relevant in relation to both upstream and downstream partners. The study here concentrates on the institutionalization process involved in relation to suppliers, and how IKEA has been able to influence their behavior and mobilize their support for its market strategy. Indirectly, our case shows how interactions with other market players are a part of the institutionalization process. We define the organizational field as a hub-and-spoke system of dual networks configured around the IKEA headquarters. IKEA sits in the hub of an organizational field and regulates the upstream and downstream constellations by propagating system-wide influences in norms, business practices, rules, habits, and beliefs. 1.2. IKEA and the institutionalization of supplier relationships IKEA's supply chain is organized in three parts: purchasing, range, and stores. Strategic, long term decisions concerning the sourcing network and the supply chain, as well as concerning the marketing of the products, are taken at IKEA head office. The firm is founded in the small village of Älmhult where the first store was opened in 1958. Today, it has more than 300 stores in over 35 countries. On the supply side, IKEA is organized into 40 trading offices around the world, responsible for local purchasing and daily relationships with suppliers. The development of a global sourcing network started in the 1960s and Poland was IKEA's first foreign supplier market. Today the number of suppliers has grown to approximately 1300 in over 50 countries, but Poland is still one of the biggest supplier markets, second only to China. IKEA is frequently used as an example of a company based upon a dynamic and progressive supply chain (Gattorna, 2006). This drives from its flexibility of supply chain and capacity to create, or take

advantage of, opportunities as they arise. Ever since the 1960s, IKEA's basic strategy has been to selectively externalize as many activities and resources as possible, making external networking a key competence of the firm (Larsson, Brousseau, Driver, Homqvist, & Tarnovskaya, 2003). IKEA's networking capability involves building relationships with a number of key actors in the countries where the firm operates (Elg et al., 2008), but its global sourcing network is an especially important source of strategic advantage. Supplier relationships serve the firm to cut costs but also to develop new products, find new materials and new production solutions. This also means that most supplier relationships have a long term orientation and that the majority of the purchases are made within deep and established relationships (Baraldi, 2008). In many cases, IKEA as well as the suppliers have also made substantial joint investments in their relationships (Baraldi, 2008). The supplier relationships are not just long term buyer–seller relationships, based upon trading products, but strategic commitments where IKEA places a major effort into making the suppliers understand and support the firm's business model and brand values (Ghauri, Tarnovskaya, & Elg, 2008). Supplier surveys are sent out every three months in order to evaluate satisfaction, and a newsletter is distributed to suppliers on a regular basis discussing issues such as what customers expect from IKEA. This further illustrates the concern for maintaining strong relationships based upon mutual commitment. The firm also has a supplier's ombudsman who is responsible for looking after the suppliers' interest and making sure that they are treated fairly. Another example of a broad value orientation is that IKEA systematically engages the suppliers in social responsibility efforts and in developing a credible CSR strategy. For example, the supplier survey includes statements regarding IKEA's standards regarding foresting issues and child labor. For this article IKEA case is selected because it shows that strategic adaptation and alignment of relationships can be both imposed and upheld strategically by a unit in an organization (in our case, by the IKEA headquarters). By means of cognitive orientation, the IKEA headquarters has been able to strategically encode members through a socialization process. When internalized, this process provides a script (patterned behavior), and the network members accept it as a blueprint for desired behavior. In enactment of the IKEA institution, the coding process represents a means to externalize or objectify patterns of norm, values, and accepted behavior which members can see in play and start a new round of socialization. After some time, the institution (and the resulting patterned behavior) becomes regimented and taken for granted. Then, it might be difficult for the network partners even to realize that their behavior is in fact partly controlled by an institution. Acting in accordance with the norms of the institution is viewed as rational by those who share the institution. Our study shows that such homogenization in the IKEA system is an intentionally implemented strategy. 2. Method The study here develops existing theory further by generating new insights. An inductive and qualitative research method is applied in the line (Eisenhardt, 1989; Yin, 2003). Following previous studies we show that in-depth cases can generate a holistic perspective, a description that considers a number of different dimensions (Elg et al., 2008; Ghauri, 2004; Stake, 1995). An in-depth case study approach can generate unique insights into the complexity of inter-firm processes (Parkhe, 1993). Moreover, coverage of IKEA includes their supplier relationships in Russia and Poland. These are two important supplier markets and yet very different in their institutional environment. Poland is the first foreign supplier market and appears in the company history as a milestone in supplier network development. On the other hand Russia is a promising outsourcing partner with good prospects but still in an early development phase. Currently, Russia represents less than

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1% of IKEA's global output mostly in the solid wood industry. Looking into different points in the spectrum of development, the supplier relationships in these two countries represent fairly distinct cases with regards to the history, life cycle position, and prospects of partners as well as the strategic importance for IKEA. They also examplify stable and harmonious relationships as well as those who have recently been in a more turbulent phase. The study is based on direct interviews with managers both at the corporate level and with supply chain managers. We considered the sample universe as a hub-and-spoke format. At the hub, IKEA managers were interviewed and at the spoke their counterparts were included into the interview sample. Interviews were conducted face to face in a semi-structured format. Then the transcripts were used as the major data collection technique supported by an extensive use of secondary sources and observations at both IKEA's corporate offices and supplier locations (cf. Ghauri, 2004). In total, 51 interviews were carried out as shown in Table 1. In selecting IKEA, our premise was that IKEA is “a unique case” with its global footprint and experience in that it offers special opportunity to make a significant contribution in theory building research (Ghauri & Grønhaug, 2005; Yin, 2003). As part of the data gathering, we also visited different supplier sites and conducted interviews at these sites. The interview topics addressed such issues as: the state of relationships with IKEA; technical, managerial, and financial assistance received from IKEA; trust and mutual understanding between IKEA and the company's representatives; IKEA's brand and its role in the design and production of IKEA's product range; and reactions to various IKEA policies and initiatives. The interviews were recorded and then the transcripts were translated. On the IKEA side, we conducted interviews at the offices in Sweden with respondents holding high and mid-level positions. Our interviewees included the senior assistant to the founder of IKEA, Ingvar Kamprad, and the global purchasing director, commercial managers for two functional areas, human resources manager, and project managers. In both Russia and Poland, executives at the country office level were interviewed. This broad approach enabled us to get different perspectives on the role of supplier relationship development and allowed us to triangulate our findings. All respondents were either currently involved in supplier relationships or had previously been responsible for supplier development during their careers at IKEA. On average, an interview lasted for 90 min. The interviews were transcribed and analyzed using Miles and Huberman's (1994) and Ghauri's (2004) recommendations regarding clustered matrix coding techniques. In the context of cross-cultural survey-based quantitative research, issues of equivalence and comparability are considered to be particularly important (Ewing, Salzberger, & Sinkovics, 2005), but should be regarded as equally important in qualitative research (Ghauri & Firth, 2009; Sinkovics, Penz, & Ghauri, 2005). Therefore, it is especially important to stress that due to the linguistic proficiency of the research team, all interviews were carried out in the native language of the respondent. Thus, the interviews were carried out in English, Swedish or Russian. In accordance with the practice of relying on multiple sources of evidence to develop “converging lines of inquiry” (Yin, 2003), comprehensive documentary data were also collected and used for the analysis. These included corporate documentation and publications, internal bulletins, business plans, information on the IKEA

Table 1 List of interviews in Russia and Poland. Management level

Number of interviews Place of interview

Ikea corporate level managers Ikea managers in Russia Ikea managers in Poland Supplier representatives in Russia Supplier representatives in Poland Total

14 19 10 4 4 51

Interviews in Sweden Interviews in Russia Interviews in Poland Interviews in Russia Interviews in Poland

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homepage and intranet, and newsletters to suppliers, which all helped us to triangulate the data collected through different methods. More specifically, the research includes the following suppliers. The first Russian supplier is a ceramics factory at Konakovo in the Moscow region. It relies on IKEA as one of its biggest accounts and it expected to supply about 10% of the total turnover in the coming years to IKEA. This actor is referred to as Supplier 1 in the text below. The Priozersky factory in the St. Petersburg region (Supplier 2) has worked with IKEA for almost 40 years and IKEA has been instrumental developing this supplier's business. But in spite of the long history, the relationship was currently exposed to turbulence due to the supplier's intent to diversify the customer base. The third Russian supplier, Lenraumamebel in St. Petersburg, had a large and modern production plant designed especially for IKEA. The relationship started in 1994. It was interrupted for a short period but resumed in 2003 and at the time of our study, about 40% of the supplier's production was made for IKEA. Still, their plan was to elevate IKEA to become an even more dominant customer in the future. In Poland, one firm (No. 4 in the text below) was PROFIm in Turek that supplied three types of office chairs. IKEA was this supplier's main customer and accounted for about 20–30% of the production. Swedwood, Poland (Supplier 5, which is owned by IKEA) produced wooden furniture and it differs from the other cases by being a fully owned enterprise. This supplier desires to become an independent manufacturer serving other customers. According to respondents, this caused some difficulties and ambivalence in the relationship with IKEA. 2.1. Conceptualization based upon the empirical study Fig. 1 presents the theoretical framework developed from this research. It is originally anchored in earlier studies. However, our approach has enabled us to further refine the understanding and modify the framework. Fig. 1 can thus be regarded as a result of our iterative research logic, and it represents a useful outcome of our work. The study follows Scott's (2001) pillars of institutional influence and discusses the regulative, the normative, and the cognitive pillar for each dimension. According to this framework, we explore IKEA under various force fields. The purpose of this exploration is to use an institutional lens to construct insights that is generalizable from the context of IKEA. The focal company which holds the hub indoctrinates the members at the spoke positions with symbolic patterns in order to serve the cognitive needs of the network. We explain the cognitive influences as channels for imparting of symbols, culture, and information in order to converge to organizational unity. We conclude that having the symbolic aspects of social exchange in place is not sufficient; it creates understanding but hardly initiates behavior. Therefore another component of enculturation, in which behavioral motivators and monitoring mechanisms are put in place, is needed. This part of the organizational development involves incentives, controls, and also a governance process. We label this category as regulative influences which we discuss as part of the order and conformity process. Finally, the normative influences set up the implementation motives. It should be stressed that we do not intend to glorify IKEA. We consider IKEA with its merits and demerits, as an anchor to offer insights to untangle the development of strategic supplier relationships under the institutional perspective. 2.2. Behavioral dimension The behavioral dimension involves driving the actors, activities and resources in the organization under the institutional blueprint. The discussion explores IKEA's approach to behavior modification based on a socialization process. In that process, three set of forces, cognitive, regulative, and normative influence the transformation.

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BEHAVIOURAL DIMENSION Influencing the actors, activities and resources in the organization under cognitive, regulatory and normative rules.

The values, structure, processes, and superior capabilities

Consistency

Isomorphism (rooting of best practices across the organizational network)

Global strategic advantage

CONSTITUTIVE DIMENSION Instituting, and legitimizing influences that are cognitive, pragmatic, normbased

Fig. 1. An institutional perspective on the development of supplier relationships.

2.2.1. Behavioral base for cognitive influences Cognitive influences of institutions entail patterns, symbols, words, signs, gestures as well as cultural rules and frameworks that guide understanding of the nature of reality through which the meaning is developed (Grewal & Dharwadkar, 2002). They form the integral part of taken-for-granted beliefs. Organizations will often conform to them as a form of reflex. Such a reflex in symbol and pattern exchange is a necessary component of strategic posture alignment. A successful global strategy requires fast reactions in which cognitive influences address the other actors' interpretational integrity in order to tune up behavior in the organizational field. In our discussion below we argue that companies who manage to develop supplier relationships into a source of a global competitive advantage need to construct a cognitive orientation to arrive at social unity by (a) enhancing personal bonding (b) sharing values and resources horizontally and, (c) employing expertise as a means of affinity. This approach underlies the significance of the individual as it adopts an approach that progresses from the bottom up. 2.2.1.1. Enhancing personal bonding. In all cases, the relationships between suppliers and IKEA were built up over several (5–35) years and developed on a very personal level. Several respondents mentioned the closeness and informal character of relationship as well as their continuity and regularity as an important success factor. For example, Supplier 1 explained that his IKEA's contact became for him “IKEA's face”, contributing to his feeling of trust towards the whole organization. Supplier 3 commented on the easiness of reaching understanding with IKEA's contact persons due to their good knowledge of factory conditions. This respondent also commented both on the role of a good personal relationship in resuming the contacts with IKEA after a temporary “break-up”: And in principle, the contribution of T. has been sufficiently important. Previously, when the IKEA representatives came, I cannot say we were unable to find a common language, but all our negotiations resulted in nothing. And when T. came to us, we managed to agree rather rapidly (Technician). Personal bonding appeared to facilitate collaboration involving exchanges of vision and business ideas, technology, and in some cases finance. Supplier 4 reported regular (several times a day) telephone contacts with his local IKEA representative and stressed that all problems were resolved through these interactions. On the other hand, after dropping the interaction frequency to only occasional

contacts, or frequently-changing IKEA contact persons, the relationship stepped into an adverse slope. For example, perceived lack of dialog by both Suppliers 2 and 4 resulted in a cautious approach to the increase of production for IKEA. The alienation between the partners has emerged and seriously affected the outcomes of other activities as illustrated by Supplier 2. As expected, personal bonding and the resulting suppliers' satisfaction play a crucial role in the speed of the development process and the technical level achieved by the suppliers. At IKEA the social upper structure is built and maintained from personal relationship dyads in a stable long term investment of social capital. These dyads are used to strengthen the cognitive base (symbols, signs, patterns and so on) as channels of social enculturation. 2.2.1.2. Sharing values and resources horizontally. Respondents stressed the importance of building horizontal relationships with factory managers and technical personnel. By bridging the company, relationships at parallel levels enhanced resource sharing, for which respondents mentioned technology, new (environmentally friendly) materials, expertise in flat-pack production, delivery methods, quality testing and control, training, global network of suppliers and financial support. They also described the role of IKEA's trading organization and mentioned that local trading and supply managers were among those most actively involved in the daily interactions. IKEA technicians were also involved in the technical support and control through regular visits to production facilities. Technicians were often referred to by factory representatives as most trustworthy people with significant technical expertise. In summary, at IKEA the foundation of inner social infrastructure emphasizes sharing values by engaging same-tier personnel with their counterparts in the other parts of the network. 2.2.1.3. Employing expertise as a means of affinity. Personal ties emerged over time and influenced the suppliers' willingness to share knowledge and expertise, their desire to participate in training, and their engagement in IKEA's code of conduct. The strongest bonding was observed between the corporate and factory technicians stemming from shared expertise. The expertise usually focused on the technical know-how and knowledge of the production process as well as the factory's general capabilities and standards (Hitt et al., 2004). Having the necessary expertise was considered by suppliers as the most desirable factor in the relationship: “G. is a very prominent specialist. He has been working with IKEA on woodworking for quite a long time. He is a very

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serious technical specialist. What else can be wished? All that we need we get” (Technician at Supplier 3). Observations indicate the contrast between IKEA and many other organizations as they point to the nature of organizational integration. At IKEA, it is not the reporting structure, but the expertise, which is utilized to link individuals. With the common language and patterns of expertise, this approach is more effective in tuning the individual to the larger social cognitive collective. 2.2.2. Behavioral base for regulative influences Regulative influences of institutions most commonly take the form of governance and control (Grewal & Dharwadkar, 2002). In case of non-compliance, the members are subject to the threat of penalties in pre-specified rules, norms, and standards (Ghauri & Holstius, 1996). The regulatory influences establish the norms for self-interest and resulting clashes. Their resolution is the first requisite for convergence to consistent, sustainable, and correct strategic direction that is required. In our discussion below we argue that companies who manage to develop supplier relationships into a source of a global competitive advantage need to build their regulative orientation on (a) ensuring goal alignment, and (b) building transparency of purpose. 2.2.2.1. Ensuring goal alignment. Each supply partner, with its idiosyncratic character and its role in the network, has to manage its own goals against the roles of the entire network. The primary requisite for goal alignment challenge is the clear understanding of interest clashes. Supplier 3's testimony notes that its factory had undergone a radical change “from no mission to IKEA's mission of saturation of the market with high quality and inexpensive products.” This supplier felt that the alignment of goals was decisive in the partnership. On the other hand, the less successful relationship was marked by opportunistic behavior (Supplier 2) and characterized by a strong skepticism towards IKEA's vision and (environmental) strategy referred to as “marketing tricks”. Indeed the most successful relationships (Suppliers 4 and 3) displayed excellent understanding and genuine adoption of IKEA's vision as the embracing guideline for the new value proposition. 2.2.2.2. Building transparency of purpose. Although workers were not directly involved in interactions with IKEA managers, they were aware of the importance of IKEA policies. They were informed about the factory's customer base as well as of the specific requirements (production, working conditions, environmental) set up by IKEA. For example, Supplier 3 stressed, “Every worker knew what is required of him. He comes to work with a purpose”. 2.2.3. Behavioral base for normative influences Normative (or social) influences of institutions typically take the form of rules-of-thumb, generally accepted practices, standard operating procedures, occupational dicta, and training programs (Grewal & Dharwadkar, 2002). An effective global strategy is not only an economic proposition but it is also a social conviction. It requires guidance under the silent contract of obligation or professionalism. Partners will abide by the social contract in value, moral or ethical responsibility under the supervision of the control authority and also under the watch of the entire community (Hadjikhani & Ghauri, 2001). We argue, with regard to the IKEA experience, that companies who manage to develop supplier relationships into a source of a global competitive advantage need to construct their normative orientation by (a) building sensitivity to local values, (b) developing forward-looking strategic fit and(c) offering necessary education and training to reinforce the functional aspects. 2.2.3.1. Building sensitivity to local values. Orchestration of a large network across the globe requires effective coordination and sensitivity to local norms. Any discordance due to poor coordination, whether

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behavioral or formal coordination (Wu, Sinkovics, Cavusgil, & Roath, 2007), reflects on performance. Our study illustrates how a lack of local sensitivity on behalf of IKEA managers created problems that influenced suppliers' performance. For example, Supplier 2 commented on the unwillingness on IKEA's part to take into account the existing industry norms and standards, “…a guy comes from Sweden and says it should be done this way or that way. But excuse me; there is the forest code, forest legislation. And you can tell the supplier a lot about how to stock timber, but all the same time he will follow the existing code and coordinate his actions with forestry.” 2.2.3.2. Developing a strategic fit. A consistent global market strategy based upon supplier commitment can only be successful with a certain fit between the adaptations and functional modifications required from a certain supplier, the business models and strategic orientation of that actor. For example, the adaptations made by Suppliers 2 and 4 corresponded well with their strategic orientation. However, Supplier 1 was based upon a broad assortment of relatively advanced and technologically complex products and unique designs developed by the manufacturer. This supplier was much more reluctant to modify its operation and rely on the relatively simple IKEA designs and products, since it would partly jeopardize the firm's basic strategic direction. In result, IKEA was not expected to become a key customer. The differences between Supplier 1 and Supplier 4 in terms of volume, partnership history, work culture, degree of socialization and so on show that it is critical for the firm to align the partners according to their strategic leverage in the value proposition. 2.2.3.3. Offering training programs. In order to ensure a partner's advancement, IKEA is particular about training. In our interviews, all suppliers reported participating in some development program at IKEA in Sweden, at Swedwood, or at their own premises. Thus, Supplier 2 mentioned receiving an extensive HR training and coaching during the difficult perestroika time and the subsequent management crisis at their factory. Supplier 3 talked about good possibilities for their workers to get training at Swedwood factories, while Supplier 4 mentioned the extensive technical training at the quality testing laboratory in Sweden, which allowed this supplier to introduce similar equipment at their factory. While appreciating the possibility to receive training for management and workers, some suppliers expressed the wish that IKEA customize it to local needs and conditions: “Training and learning should be down here, on the spot, in the specific situation!” (Supplier 2) While the less successful partners voiced their concerns, the benefits of capability development through training were recognized (by Suppliers 4 and 3) as the critical leverage for new value generation. 2.3. Constitutive dimension This dimension involves shaping institutional structure with respect to rules, norms, standards with which the functional aspects are legitimized. In that, there is a unity of acceptance of embedded structure and regulation. Streeck and Thelen (2005, p. 16) point out that institutional process is “continuously created and recreated by a great number of actors with divergent interests, varying normative commitments, different powers, and limited cognition.” Thus, both rule makers and rule takers shape institutionalization in time and space. 2.3.1. Constituting a base for cognitive influences The cognitive function finds its legitimacy in constitutive space. To that end IKEA has constituted identity related values, so that the shared conceptions about partner interests and collective interests are negotiated with common symbols. Once such a social base was established, they were able to ensure means of enforcing rules and preventing illegitimate action. As far as local suppliers were concerned, the relationships with IKEA became a joint responsibility of the factories'

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directors/managers and technicians. All suppliers mentioned the involvement of factory workers in their relationship with IKEA. Suppliers 1 and 3 reported that factory workers often visited IKEA stores to look at how their products were part of total room settings. At Supplier 4, all workers involved in the production process for IKEA knew significantly about the company: “They visit IKEA stores and know our products” (Managing Director). Meshing individuals into a larger social collective requires a process with a clear anchor. The IKEA Company's brand identity as publicized in the market serves as the social glue at IKEA. Associating themselves with such brand identity allows individuals to align the cognitions of the market-view of the company (external) with company specification of identity (internal). 2.3.2. Constituting regulative influences Our observations show that IKEA headquarters initially focused on constituting a system of headquarter-dominant governance. Once constitutive aspects were sufficiently matured, the headquarters gradually changed its role to become a facilitator. This encouraged the system to function more directly between the downstream and upstream partners easing the iron-clad control of headquarters. As the institutional infrastructure matured, the headquarters' supervisory emphasis passed from process to outcome. The support also shifted from operational factors to innovation and control went from authority-centric to social. This was evident when analyzing the nature of the supplier relationships, where the Suppliers 1 through 5 represented different stages of institutional development. 2.3.2.1. Constituting the Code of Conduct. If the firm is to involve supplier relationships as an active part in its global strategy, it requires the company and its entire supplier network to reach consensus on the value of activities which it must perform, and how individuals engage in conducting the activities. Thus, the focal company has to act as a leader setting the rules. Establishing a four-level Code of Conduct “pushes” its supplier network towards adopting IKEA's strategic orientation and values. Supplier 1 was on the first level of the Code of Conduct (has improved working conditions and safety standards), Suppliers 2 and 3 were at level two (has met all necessary requirements of IWAY), while Supplier 4 had reached the fourth level (ISO 9001 certification). 2.3.2.2. Constituting legitimacy for norms and conduct of control. One way to improve general acceptance of norms across the firms is to establish standards that are transparent to partners. This is usually carried out via visits to factories that IKEA trading managers and auditors carry out on a regular basis. The goal is not only to introduce standards that are possible to implement but also to explain the importance of meeting the minimum IWAY standards for each factory. Successful suppliers exhibited a good understanding of IKEA's norms and standards and they showed strong confidence in the relevance of these rules for their respective development. On the other hand, the less successful partners expressed skepticism and poor understanding of the applicability of IKEA standards to their situations. Accordingly, the level of motivation to meet the standards was different from one partner to another. 2.3.2.3. Constituting standards as inducements. Although it is much easier to deal with uniform forces, global companies do not have such luxury. In the interviews, country-specific factors were frequently brought up. For instance, in Russia, IKEA managers mentioned cooperation with other international retailers to increase the local production standards. This was considered an important trigger for local industry development as well as a necessary support in the country where certain standards (environmental or technological) were less demanding than the international ones. In Poland, where standards are high, IKEA arranged

for professional consultants to help suppliers with efficiency improvement. Additionally, the focus of corporate activities was also different in the two countries. In Russia the focus was on “pushing” suppliers to enhance their technical standards, improve efficiency, and boost the price competitiveness of their products. In Poland, the focus was more on developing the most promising suppliers and streamlining the number of partners. 2.3.3. Constituting normative influences Constituting normative influences is rooted in instituting a process of socialization in which transformation takes place toward performance-conscious organization. This involves facilitating closer distance between all actors, enhancing social interaction within the constellation of partnership. The ultimate goal is to ensure the efficiency of the internal market to exceed the external markets. Indeed, IKEA suppliers are provided incentives to abandon their older technologies to fit IKEA's norms and the new partners are trained in efforts to take the system to a higher performance. In order to get the best out of the new blood, new inductees are put into a social development program in which their diversity is adjusted to the establishment. In our study, all respondents reported certain technological changes that took place at their factories. This was considered important in spite of the “headache” it brought for the workers at production sites. 2.3.3.1. Constituting efficiency of internal markets. One of the factors which determine the partner connectedness is the level of credible commitments. IKEA initiates product projects by a call for a closed bidding process for which all internal and external suppliers tender their bids. At the end, if necessary, financial support from IKEA is provided to the winning bidder. Thus, it is not surprising that all respondents discussed the financial support received by factories from IKEA. Interviews revealed that some suppliers (Suppliers 2, 3 and 4, in particular) had received significant funding while others (Supplier 1) were only starting at getting this support. For Supplier 2, assistance received “help from the factory to survive all crises” during the turbulent perestroika times in Russia in the 1990s. Supplier 4 stressed the importance of a joint investment as it was preparing a new assembly facility that would allow increasing efficiency also for other IKEA furniture producers in Poland and elsewhere. A proactive and positive attitude of this supplier was clear in spite of the anticipated problems in negotiations with IKEA. On the contrary, the problems in relationships perceived by Supplier 2 hindered this factory from receiving the planned loans from IKEA. As explained by the managing director of this factory, and referring to IKEA's policy to move personnel between functions, “the unfortunate situation with IKEA personnel” forced his factory to find another investor, an Italian company. Overall, the interviews showed that new value propositions were pegged to the degree of efficiency of internal factor markets. 2.3.3.2. Induction of new partners. In new markets like Russia, where the search for suppliers was an on-going process, high-level managers and even Ingvar Kamprad, the company's founder, were sometimes involved at the earlier stages of relationships. Thus, Kamprad's contacts with Soviet and Russian officials were invaluable for building up the partner base in this market. In Poland, managers stressed the role of business developers – people combining the knowledge of product development, finance and logistics – who helped suppliers to develop necessary competences. It is extremely important that new inductees bring power to firm constellations, in order to prevent inbreeding in innovative potential. Specifically, at IKEA new partners are not considered to be a threat to the established social fabric; contrarily they are accepted with their newness and viewed as fresh blood to strengthen the plurality. As a result, the new members feed the evolution with variance and protect the network from isomorphing into a collection of similar units of perpetuating inefficiencies.

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2.3.3.3. Constituting social norms to ensure asset deployment efficacy. IKEA's global strategy is characterized by restructuring of the value chain for better performance (Jaworski et al., 2000). Suppliers benefited from corporate support in product technologies, materials, and knowledge on production process, quality issues, loans and lease of equipment. Effective resource allocation helped suppliers develop new competencies (e.g. speed of production, high and consistent product quality, efficiency in production and delivery) and gain competitive edge. Still, some assets were also used less effectively. Here, the respondents mentioned training and the global network of partners — for which the resources were under-used by the suppliers, due to the perceived difficulties to adjust to local conditions. As far as local suppliers' resources were concerned, the ones most shared with IKEA were knowledge of local customers and market conditions, local technologies, contacts, and capital. However, these were not always fully used by IKEA headquarters. For example, local contacts and local industry norms and standards were frequently under-utilized by corporate management due to lack of cultural sensitivity. 2.3.3.4. Constituting norms as a means to share knowledge. In contrast, when IKEA managers listened to supplier ideas and suggestions, it created a strong impression on supplier managers and hence resulted in a more positive and even pro-active attitude of suppliers towards the relationships. Thus, Supplier 1 spoke proudly about the way they influenced product designs (the size and color of IKEA plates), Suppliers 3 and 4 mentioned their regular sharing of new product ideas, industry information and price situation with IKEA representatives to be passed on to others. By taking into consideration the expertise at various points, IKEA offered new products to local customer needs faster, which increased sales and contributed to IKEA's image in Russia as caring about needs of customers. The level of personal relationships between the factories' and IKEA representatives also influenced the intensity of local information sharing. In many cases, the respondents reported the comfort and ease with which information was shared with IKEA's local staff and big difficulties in approaching the corporate IKEA, where the key decisions were made. 3. Discussion In the development of supplier relationships into strategic assets on new markets, legitimacy through endorsement was the key gauge for assessing social fitness. The IKEA system endorses the actions of a partner in terms of desirability, suitability, or appropriateness in the socially constructed system of norms, values, beliefs, and definitions. Unlike the economic approach, with its emphasis on uncertainty reduction and pecuniary outcomes, the institutional conversion at IKEA focuses on social fitness, which in turn leads to the development of processes that result in lower dependence, and higher innovative capability to achieve strategic goals. This is ensured by emergence of corresponding institutional mechanisms that directly influence the internal policy and indirectly facilitate the economic outcomes in the IKEA network. Alternatively, the IKEA values and norms gain legitimacy in the culturally different supplier markets by demonstrating how they fit in into the norms and practices of the actors within the organizational field. Gaining legitimacy is critical when operating in different socioeconomic environments (Hadjikhani & Ghauri, 2001) and the case study illustrates how a firm may achieve different types of legitimacy that support its strategic approach in a new market (cf. Suchman, 1995). By offering valuable resources and knowledge at an early stage, IKEA gains pragmatic legitimacy (Hadjikhani et al., 2008). In showing how the “IKEA way” can contribute to society, the firm gains moral legitimacy, while cognitive legitimacy is ensured through educating the suppliers and explaining their roles within the value chain and the IKEA network in general.

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In line with theory, the process of isomorphing takes place alongside mimetic, normative, and coercive inducement for the benefit of the entire system. In general, the IKEA case is a good example of how to diffuse the consistent strategic orientation within organizational fields. Aligning the supplier network demands policies that feed the innovative capability as the system prunes the substandard practices. In Poland, this was partly accomplished by reducing the number of actors and eliminating less effective suppliers while strengthening those remaining in the network. Indeed, technical knowledge and environmental expertise that suppliers received from IKEA was underscored by all respondents. One of the suppliers mentioned improved working conditions and safety standards, while another one appreciated new technologies and environmentally “pure” materials, and yet another one mentioned the capabilities “borrowed” from IKEA's quality testing laboratory. This laboratory and the exchange of expertise in quality testing allowed this supplier to reach the status of a high-quality office chair producer on a global scale. Top management from both sides was involved in developing an institutional base in all cases. IKEA headquarters has been very successful in conveying and convincing its suppliers to follow its mission, values and business ideas. By recognizing the evolutionary levels, IKEA has leveraged the social and economic fitness by providing financial, operational support and training needed to comply with its code of conduct and standards. The long-term commitment to mutually beneficial relationships facilitated institutional and economic development of suppliers despite the occasional lack of understanding between the parties and the perceived irrelevance of some corporate activities. This suggests that managers on the specific supplier situations and the actual market should place more attention on finding a better fit between the corporate and local market norms and standards. By enhancing managers' understanding of supplier conditions through greater interaction and exchange of knowledge, a partner can make better use of its own resources invested in the supplier relationships as well as activate and utilize supplier resources for the mutual benefit of the parties. 4. Conclusions and implications Research evidence presented here advances our understanding of the social mechanisms behind developing strategic supplier relationships. The firm's supplier network should be regarded as an asset deserving long term commitment and worthy of difficult-to-reverse investments. This appears to be especially reasonable considering that today competition is often regarded as taking place between well run inter-firm constellations (Achrol, 1997; Day, 1994; Elg, 2000; Ford, 1998; Morgan & Hunt, 1994). Fig. 1 stresses that institutional factors matter; better performance will follow when an institutional base is established and functionalities are adjusted to external markets and the realities of the constellation of partners. The provided empirical evidence illustrates how different dimensions of supplier relationships can be managed in order to transform them into a strategic force. It also shows that institutionalization is a long term process, where these dimensions support and reinforce each other. Moreover, joint activities and personal bonding can lead to shared values and goals, and an efficient coordination of the different tasks. At the individual level, empowerment of managers and employees is also a crucial part of the institutionalization process. All parties involved need to further demonstrate their commitment and dedication to the goals and values. The study stresses the importance of understanding and managing the interaction among the individuals, firms, and constellation of partners consistently. For example, if suppliers experience that the personal relationships are not supportive enough, it may jeopardize the whole strategic approach and make the partners question the basic values that the firm represents. A systematic and skillful network orchestration is thus required. The study demonstrates that if a firm's basic competitive strategy is to be logically integrated with the strategic supplier approach, it is

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necessary to ensure the consistency of social and economic elements. Consistent with Grewal and Dharwadkar (2002), the findings affirm that organizations strive for economic fitness, which considers the scarce resources and underscores the importance of the task environment, along with social fitness which emphasizes the pursuit of legitimacy accentuates the significance of the institutional environment. We also stress that in order to successfully drive the institutionalization process within the supplier network, the firm must match functional aspects and tangible incentives with constitutive and intangible elements. The interplay between these dimensions has been neglected in previous research. This qualitative study finds many interesting features in IKEA that may advance the theoretical grounding of institutional influence. Compliance: The socialization starts from explicit rules of the institution. This regulatory system establishes the first step to compliance. As the partnerships evolve, the compliance base shifts from expedience to social obligation. Mechanism: At the onset the mechanism of developing influence is regulatory (coercive), then it shifts to normative by giving identity to members, knowledge sharing(c.f. Möller & Svahn, 2006) and developing goal alignment, and finally after internalization of the institutional influence, members' behavioral consistency sustains itself by imitation of peers (mimetic tendency). Logic: The regulatory base for influence is established by contractual provisions in which rules, laws and sanctions are put in place for instrumentality of the influence. Normatively, on the other hand, the system is governed by a moral code, a silent acceptance of social order which is implemented in certification and accreditation of members. Cognitively, an embracing culture is instilled which endorses isomorphic behavior of members. Legitimacy: At the onset, the acceptance of the partner as part of the institution is sanctioned by contractual specifications. Second, the moral and social acceptance emerges in the normative venue by interaction, training and social governance. At the end, cognitive mechanism dominates and the legitimacy emerges in the process by creating a common understanding of what is understood as normal in the system. This is a qualitative examination of a single firm and its supplier relationships. One of the strengths of this study is the offering of a rich, in-depth understanding of the mechanisms at work and development of a theoretical framework. On the other hand, the study does not provide a basis for statistical generalization and it remains to be seen whether the proposed framework applies to global firms in general. A large number of important international firms may not share many of IKEA's characteristics or business format. All in all, however, the framework and propositions in this article offer a rich basis for future studies on a broader sample of firms representing different industries and characteristics. Acknowledgment The authors thank Handelsbanken's Research Council; the Jan Wallander and Tom Hedelius Foundation for their financial support and IKEA for their cooperation during the research process. We thank Tamer Cavusgil, Georgia State University, USA and Fatima Wang, King's College London, UK, for their useful comments. References Achrol RS. Changes in the theory of interorganizational relations in marketing: toward a network paradigm. Journal of the Academy of Marketing Science 1997;25(1): 56–71. Andersen PH, Christensen PR. Bridges over troubled water: suppliers as connective nodes in global supply networks. Journal of Business Research 2005;58(9):1261–73. Andersen PH, Christensen PR, Damgaard T. Diverging expectations in buyer–seller relationships: institutional contexts and relationship norms. Industrial Marketing Management 2009;38(7):814–28.

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