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Trust in buyer-seller relationships

q3-01

Article

Poppo, Laura; Zheng Zhou, Kevin; Li, Julie J. "When can you trust 'trust'? Calculative trust, relational trust, and supplier performance." Strategic Management Journal 37 (2015): 724-741.

Summary

This research looks at two types of trust in buyer-seller relationships: Calculated and Relational. Calculated trust is predictive: Future performance is based on rewards and penalties. Relational trust looks backwards to predict behavior on the basis of past judgements about behavior. The article looks at the issue uniquely from the buyer perspective. Calculated trust was stronger than relational trust, particularly when supplier performance was a concern, but both were positively associated with successful relationships. Some limiting factors to the strength of calculated trust included times where the buyer was “locked in” to a dependent relationship with the supplier, which inhibited trust, or where there was market uncertainty about the product being purchased. During those two circumstances, relational trust became more important.

What this means for food and agricultural businesses

One of the most interesting aspects of this study was the idea that trust isn’t just binary—where there is trust or there isn’t—and that there is more than one type of trust. In many industries, trust has historically referred to social relationships in which trust is established over time with repeated positive performance. This works well in some circumstances, but not in others. It seems obvious that built-in incentives or penalties, would be reassuring, because they may be legally enforceable, but even that approach doesn’t work well in some circumstances.

Specifically, the article points out that relational trust is important for buyers when they are “locked in” to a supplier or where the supply of a product was uncertain. The idea behind being “locked in” is that the buyer had, for example, purchased a guidance system that could only be used on a specific type of equipment or had built a building to accommodate a particular type of milking equipment. The idea behind the value of relational trust in these circumstances is that the seller knows the buyer doesn’t have much flexibility.  The buyer knows that the seller is aware of this and so relies on past performance in the relationship to know that the seller won’t take advantage of them, even though the seller could take advantage of them.

When the supply of a particular product is uncertain, the seller benefits from relationship because their past history shows that the seller will take care of them. In the case of a limited amount of a particular seed, for example, the buyer relies on the seller to supply them over others. In the food industry, a limited supply of a hot item, say sweet corn before the Fourth of July, engenders relational trust so that the supplier will provide corn in time to take advantage of market premiums. While there are some behaviors that can be contracted, litigation is time consuming and expensive. The revenue lost from missing the short-term demand cycle for this product might not offset the time and hassle of a legal solution after the fact.

While the article is written from the perspective of buyers, there are important implications for sellers too. While in most cases buyers are not locked in to a relationship, the switching costs and perceived risks might be seen as high. In those circumstances, recognizing buyer loyalty with a small exception to a “rule” or providing an unexpected benefit relative to competitors might confirm the importance of relational trust.

Conversely, when supplier performance is critical or when relational trust is lower, the seller might want to offer guarantees or perhaps want to make processes very clear, thus establishing calculated trust, in order to offset lower levels of relational trust.

AUTHOR
Scott Downey
Scott Downey
September 22, 2016