Measuring Value in Business Relationship Judit Simon Budapest, November 13, 2007

Integrated Business Relationship Value Model

Operation Process of the Model Value levelValue types Economic value (utility)Social value (motivation) Exchange episode  recognition of the product  importance of the product to the supplier  suitability of the financial conditions  personal relationships  satisfaction with the product  security of supply of the product Relationship  profitability of the relationship  decreasing the transactional costs  supply potential of the relationship  smoothness of the relationship (routines)  security of the relationship  competence of the supplier Network  own portfolio management  network potential  related effects  emanation of the relationship  the supplier’s position in his own industry  non-market strategy of the supplier The buyer’s perception

Operation Process of the Model Value levelValue types Economic value (utility)Social value (motivation) Exchange episode  possibility of manufacturing the product  importance of the product to the buyer  suitability of the financial conditions  personal relationships  the buyer’s satisfaction with the product  security of product sales Relationship  profitability of the relationship  decreasing the transactional expenses  income potential of the relationship  smoothness of the relationship (routines)  security of the relationship  competence of the buyer Network  own portfolio management  network potential  related effects  emanation of the relationship  the buyer’s position in his own industry  non-market strategy of the buyer The supplier’s perception

Operation Process of the Model 1. Definition of the indicators: defined indicators describing the value constituents * Conducted interviews with experts to confirm whether the experts understand the definitions and agree with them * Seller side: focus group interviews * Buyer side: individual interviews * Target group: persons responsible for buying decisions and/or for relationships with partners (tried to use the multiple informants methodology, in some cases: successfully) Result: clarification of definitions and some modifications

Operation Process of the Model 2. Validation of the constructs * Questionnaires for the sellers and buyers * Company selected: one oil company in Hungary * Sample: 31 sellers, 15 buyers (test-sample) * Target group: persons responsible for buying decisions and/or for relationships with partners

Operation Process of the Model The validation methods: First generation methods: Cronbach alpha Item-to-total correlation Explorative factor analysis

Operation Process of the Model The validation methods: Second generation methods: Confirmatory factor analysis Discriminant Validity:  Test of Χ 2 -differences  Fornell-Larcker criteria

Operation Process of the Model Reliability analysisExplorative Factor analysis Economic Value IndicatorItem-to-Total Correlation Cronbach Alpha Factor loadingTotal variance explained S12S11_ S11_ % S21S21_ S21_ S21_ % S31S31_ S31_ S31_ S31_ % The supplier’s perception

Operation Process of the Model Reliability analysisExplorative Factor analysis Economic value IndicatorItem-to-Total Correlation Cronbach Alpha Factor loadingTotal variance explained S41S41_ S41_ % S41_12To eliminate S51S51_ S51_ % S51_15To eliminate S61S61_ S61_ S61_ % The supplier’s perception

Operation Process of the Model Reliability analysisExplorative Factor analysis Economic value IndicatorItem-to-Total Correlation Cronbach Alpha Factor loadingTotal variance explained S71S71S71_ S71_ S71_ S71_ % S71_23To eliminate S81S81_ S81_ S81_ % S61S91_ S91_ S91_ S91_ % The supplier’s perception

Operation Process of the Model Results of the first and second generation- methods for both the seller and buyer samples and economic and social values: Good or satisfactory statistical results EFA proves almost in all cases the hypotesis of one-dimensionality CFA proves the latent variables are measured by the indicators at a satisfactory level (some eliminations or re-assignment are necessary)

The construct of sub-model (economic const.)

Ongoing and further research Application of the second generation methods: Confirmatory factor analysis Test of the sub-constructs as measurement models (each value-constructs) Test of the integrated model (it means the 9 value constituents of the economic and social value types) After the evaluation of the pretest with the sellers and buyers we do some modifications in some set of indicators (eliminations)

Ongoing and further research The set of indicators are finalized after the pretest Data collection for the main samples will be conducted at the same company

Conclusion after the pretest At this stage of pretest we can suppose: Integrated Value Model seems to be adequate (with some changes compared to the initial model) Indicators measure well value constituents (latent variables) Business relationship value always contains the economic and the social value types

Results of MDS

Map of dyads (buyer-supplier pairs) The map is in a test-phase The map is calculated based on differencies between the buyer and seller evaluation Similarities and differencies of the positions can be explained mainly by being in other business, less with other parameter of the dyad

Value of relationship variables – economic Value constituentsSupplierAverage valueBuyerAverage value 1Possibility of manufacturing of the product 7.33Recognition of the product Importance of the product for the buyer 8.20Importance of the product for the supplier Sustainability of financial conditions 12.42Sustainability of financial conditions (B31) Profitability of the realationship 7.83Profitability of the realationship Reduction of transactional costs 4.36Reduction of transactional costs The income potential of the relationship 10.64The supply potential of the relationship The role of the relationship with the buyer 10.46The role of the relationship with the supplier Network potencial10.32Network potencial The related effect10.24The related effect8.05 Average valueEconomic value constituents of supplier 9.08Economic value constituents of buyer 9.58

Value of relationship variables - social Value constituentsSupplierAverage valueBuyerAverage value 1Personal relationships5.31Personal relationships5.84 2Satisfaction with the product 12.78Satisfaction with the product Security in product sales 5.73Security in product supply Smoothness of the relationship (routines) 13.43Smoothness of the relationship (routines) Security of the relationship 15.97Security of the relationship Competence of the buyer 10.30Competence of the supplier Emanation of the relationship 12.34Emanation of the relationship The buyer’s position in his own industry 15.77The supplier’s position in his own industry The non-market strategy of the buyer 12.54The non-market strategy of the supplier Averagage valueSocial value constituents 11.57Social value constituents 12.51

Matching of evaluations Differences between the supplier’s and buyer’s evaluation: no big discrepancies The buyer’s total evaluation is slightly higher, than the supplier’s evaluation There are some fluctuations in differencies

Ongoing and further research To formulate the final version of model To find some focuses for the further research that can be pointed out and investigated more in detailes Theoretical goals: to prove how the relationships of the model work (levels – type of relationships) Managerial implication: the matching of the elements and levels of the value perceived on the buyer and supplier sides