Gaining Strategic Advantage: Managing Social Capital in the Supply Chain

Robert R. Wharton and Linda E. Parry

Western Kentucky UniversityDepartment of Management

1 Big Red WayBowling Green, KY 42101

Track: Strategic Management/International Management, Original Paper

Contact Person: Linda E. Parry, Western Kentucky University, Department of Management, Grise 211, 270-745-5810, Linda.parry@wku.edu, 270-745-6376 (fax)

Gaining Strategic Advantage: Managing Social Capital in the Supply Chain

Abstract

The resource-based approach to strategic management suggests that competitive advantage can

be found in the different resources and capabilities a firm controls. Resources that are valuable,

rare, difficult to imitate, and can be exploited by the organization can produce sustained

competitive advantage and earn above average economic performance. Researchers suggest that

companies that learn to develop their organizational social capital will have a strategic advantage

that is difficult to imitate. This study looks at the success that Honda Corporation has had in

managing social capital in its supply chain. Using self-report surveys from 120 participants at a

Honda-sponsored supplier competition, researchers find that those people who participate in

quality-teams report that they are more satisfied with their work, feel that they improved the

effectiveness of their company, and continue to offer suggestions to improve their supplier’s

operations.

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Gaining Strategic Advantage: Managing Social Capital in the Supply Chain

Introduction

In a world where products are copied almost as soon as they are introduced into the

marketplace, building and sustaining competitive advantage is a major concern for today’s

CEOs. The resource-based approach to strategic management suggests that competitive

advantage can be found in the different resources and capabilities a firm controls. Resources that

are valuable, rare, difficult to imitate, and can be exploited by the organization can produce

sustained competitive advantage and earn above average economic performance (Barney, 2001).

Much has been written about the value of people in organizations. Huselid and Becker

(1997) found that a one standard deviation improvement in an organization’s human resources

system could increase shareholder wealth by as much as $41,000 per employee. Barney (2001)

contends that successfully managing relationships can be a source of resource-based competitive

advantage because it is a socially complex phenomenon that is difficult to imitate through direct

duplication or substitution. Consequently, there is a strong connection between how firms

manage their people and the economic results achieved. Results from studies of five year

survival rates of initial public offerings; studies of profitability and stock price in large samples

of companies from multiple industries; and detailed research on automobile, apparel, and other

industries shows that substantial gains of almost 40% can be obtained by implementing high

performance management practices (Pffefer & Veiga, 1999).

One important management practice for many companies is the relationship that they

have with their suppliers. Supply chain partnerships are relationships between two or more

independent entities in a supply chain to achieve specific objectives. Initiately these partnerships

are generally created to increase the financial and operational performance of each channel.

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These objectives are accomplished through reductions in total costs, reductions in inventories,

and increased levels of shared information. Over a period of time these partnerships can evolve

and lead to improved service, technological innovation, and product design.

The concept of managing the supply chain is not new. During the 1980s Michael Porter

described a model for operational effectiveness in which all of the firm’s activities are looked at

from the perspective of a value chain. He theorized that mastery of the value chain would allow

managers to understand how costs, quality, and value are delivered from each segment of the

organization. When properly managed, organizations can forecast, produce, ship, and assemble

a quality product or service efficiently. Companies that excel in supply chain management can

tailor products to meet customer satisfaction. This skill offers the promise of a source of

strategic advantage that others less proficient at supply chain management cannot readily

duplicate.

Many companies have adopted supply chain management principles for tracking their

products or services through the chain. However, since most companies do tracking, this skill is

not unique, and therefore, no longer offers a source of sustainable advantage. Nevertheless, there

are still methods to achieve resource-based advantage through the supply chain. Itami (1987)

suggests that developing capabilities such as teamwork among top managers, organizational

culture, relationships among other employees and relationships with customers and suppliers are

often taken for granted but can become a resource. He contends that those companies that learn

to develop their organizational social capital will have a strategic advantage that is difficult to

imitate.

This research focuses on one company in the automobile industry. The automobile

industry is important because it is the industry that has made the largest investments in U.S.

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production (Kenney & Florida, 1995). The automotive industry has also been at the forefront of

supply chain management.

Honda Manufacturing Company is among the industry leaders in attempting to increase

its competitive advantage by establishing relationships with members of its supply chain. For

example, in the past five years Honda has established networks of Honda managers and their

suppliers in order to encourage more effective partnerships. Have they been successful? In this

study, we survey the participants of these networks to determine their perceptions of their

partnership with Honda. Specifically, we inquire if the supplier team members have acquired

new skills and training; if they feel that they are more effective in their jobs; if they are making

suggestions to improve their workplace; if they feel more satisfied at their jobs; and if they feel

like part of the Honda team.

Literature Review

The resource-based view of the firm builds upon the strategy literature by noting that it is

a firm’s resources that are ultimately the source of competitive advantage. The resource-based

view posits that a firm’s internal processes create a resource bundle that can become the means

of creating and sustaining competitive advantage (Penrose, 1959; Barney, 1991). This theory

rests on two main points. First, the resources are the determinants of firm performance, and

second, that the resources are rare, valuable, difficult to imitate and non-substitutable by another

rare resource. If these conditions are met, a competitive advantage is created (Barney, 1991). If

other firms with the same resources cease efforts to duplicate the firm’s unique configuration of

resources, sustainable competitive advantage is achieved (Mahoney & Pandian, 1992).

Two forms of the resource-based view have been developed: the strong form and the

weak form (Schultz, 1992). The strong form views resources as obtainable from the market.

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These resources can then be used to establish competitive position. The weak form emphasizes

how generic factors, such as human resource practices, culture, and team-based skills, can be

applied to create temporary competitive advantages (Schulze, 1992). These factors become the

source of durable advantage if they are bundled together to make it difficult for competitors to

duplicate (Ghemawat, 1986; Penrose, 1959). Because many process innovations require

organizational and human capital, they become “hard to manage” tasks and also become difficult

to imitate, creating another source of firm-specific advantage (Barney, 1986).

Organizational social capital focuses on collections of individuals. It includes a firm’s

formal and informal planning, controlling, and coordinating systems. It also includes a firm’s

culture and reputation as well as informal relations among groups within a firm and between a

firm and those in its environment (Barney, 2001). Nahapiet and Ghoshal (1998) maintain that

the development of social capital within an organization is likely to be a source of competitive

advantage. They maintain that networks of strong interpersonal relationships can ultimately

leads to success.

One important relationship that firms engage in is with their supply chain partners.

Supply chain management (SCM) is a continuous improvement process, ensuring customer

satisfaction from raw material provider to the ultimate finished product customer. Using SCM,

companies can create a source for differentiation or cost reduction. However, coordinating the

supply chain among customers, distributors, and raw material suppliers is not an easy task. Two

issues that keep emerging are ensuring quality throughout the chain at an efficient cost and

managing relationships across organizational and international boundaries.

The total quality movement (TQM) is an integrative management philosophy aimed at

continuously improving the quality of products and processes to achieve customer satisfaction.

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TQM is based on the premise that both internal and external customers are the focus of all

activities of an organization. TQM authorities recommend that organizations work directly with

raw material suppliers to ensure that their materials are of the highest quality possible (Juran,

1974; Ishikawa, 1985; Deming, 1986). Currently, at least 50 percent of TQM organizations

collaborate with their suppliers in some way to increase the quality of component parts (Lawler,

Mohrman & Ledford, 1992). Often these organizations send out “quality action teams” to

consult with their major suppliers. The objective is to help suppliers use TQM to analyze and

improve their own work processes (Saskin, 1993).

Suppliers can contribute to quality in a number of other ways. Flynn, Schroeder, and

Sakakibara (1995) in their empirical study of 75 US and Japanese automotive firms focused on a

number of factors such as process flow management, product design, statistical feedback,

customer relationships, work attitudes, and management attitudes to determine which factors

were critical to achieving quality within the organization. They found that top management

support and supplier relationships were critical to achieving quality in the product design process

and to meeting the needs of the customer.

The ability to execute this mass customization and tailoring of products to customer’s

needs provide an efficient edge that others not using SCM find hard to replicate (Donlon, 1998).

In fact, a Harvard Business School study concluded that a key driver in the decline of U.S.

competitiveness in the international marketplace has originated from investing less in intangible

benefits such as supplier relations (MacBeth & Ferguson, 1994).

Supply chain management allows companies to become leaner and more agile.

Companies can use SCM to develop close partnerships in which each partner collaborates using

shared information to forecast, produce, ship, and assemble in true just-in-time fashion. In the

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manufacturing process alone, SCM can provide set-up time reduction, improved process-oriented

layout, better product design, and enhanced data capture (Scott & Westbrook, 1991). Ring and

Van de Ven (1994) provide an overview of the benefits of strategic partnering.

However, in the supply chain, organizations are only as strong as their weakest link, so

the challenge is to integrate all the functions efficiently. Damanpour (1991) “Truly innovative

organizations create a climate conducive to innovation in all their parts, not only in segregated

units (p. 584).” All parties must understand and be able to implement similar quality standards.

Reaching this understanding takes time, resources, and the ability to manage the relationship

between partners.

Hypotheses

The automotive industry has been at the forefront of supply chain management. Its

supplier networks are large and diverse in terms of size, technical sophistication, and global

location. Leading automotive manufacturers have developed extensive networks of suppliers

over the last decade. All of these factors make the automotive industry an ideal site for

investigation into how effectively a company can manage relationships with suppliers to gain a

sustained competitive advantage.

This study focuses on one major player in the automotive industry. Honda

Manufacturing Corporation is a leading automobile manufacturer. The automobile industry has

become increasingly competitive in recent years as evidenced by price-cutting, zero percent

financing, consolidating within the industry, lay-offs, and inventory build-ups. In an effort to

find a way to create sustainable competitive advantage, Honda has turned toward managing its

relationships with its suppliers. This management is not in the form of dictating to the suppliers

what they need to do but rather it is an attempt to build a unique resource by putting investment

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into the people who actually make the parts that ultimately find their way into Honda vehicles.

In pursuing this goal, Honda has established networks of suppliers throughout the world. Going

under the acronym of CAN (Circle Assistance Network), representatives meet monthly with

representatives of supplier companies. The purpose of the meetings is to coordinate the

suppliers, address any questions that the suppliers may have concerning production, and most

importantly, encourage the suppliers to set up teams of employees that desire to address some

problems that they see in the firm.

These “quality” teams are composed of 3-8 people who work for the suppliers. They are

encouraged to address any issue that they feel causes an environmental, safety, or production

problem within their plant. Some of the problems that teams have worked on in recent years

include oil spills on the plant floor; lack of security in the building; machinery producing too

many rejected parts; and inefficient work processes on the line. However, even the smallest

problem can result in major savings for the supplier, and ultimately, for Honda.

These teams are voluntary. However, Honda encourages supplier teams by providing

training and materials. In addition, Honda hosts a two-day competition twice a year during

which supplier teams compete by presenting their ideas, solutions, and results to a panel of six

judges. Winners receive trips, plaques, and recognition for their achievements.

These competitions and monthly meetings can be expensive. Nevertheless, it is an effort

to use social capital to gain a sustainable advantage. Coleman (1990) and Nahapiet and Ghoshal

(1998) noted social capital is a resource that is jointly owned, rather than controlled by any one

individual or entity. Consequently, any investigation needs to include perspectives of both

organization as a whole and its individual members. In this study we surveyed supplier

participants of the Honda-sponsored “Quest for Success” competition on topics relating to skill

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and training acquisition; involvement in teams; satisfaction with their company; and attitudes

towards Honda.

The ability to learn and the ability to change are likely to be among the most important

capabilities that a firm can possess (Barney, Wright & Ketchen, 2001). Without additional

training, there would be little effect on the performance of the firm. Napapiet & Ghoshal (1998)

described how various forms of social capital can facilitate the development of intellectual

capital within the firm. A strong social capital model of employment supports high-performance

work and includes investments in training, job security, and collaborative work and learning

(Pfeffer & Veiga, 1999; Ichniowski, Kochan, Levine, Oson, Strauss, 1996). These practices are

meant to build contracts between employer and employee and among co-workers in an

organization (Rousseau, 1995). Moreover, people work smarter when they are encouraged to

build skills and competence. If Honda had been successful in creating social capital, we

hypothesize:

H1: Supplier team members will report an increase in their knowledge and skills as a result of their team participation.

Teams permit employees to pool their ideas to come up with better and more creative

solutions to problems. Shaiken, Loopez, and Mankita (1997) reported that teams at Saturn and

the Chrysler Corporation’s Jefferson North Plant “provide a framework in which workers more

readily help one another and more freely share their production knowledge-the innumerable

“tricks of the trade”- that are vital in any manufacturing process.” (p. 31). This is important, as

Fiol (2001) argues, the skills, resources of organizations and the way organizations use them

must constantly change to produce continuously temporary advantages. If Honda has been

successful in building a culture among suppliers that encourages everyone to look for solutions

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continually, we would hypothesize that team members would not be just making one suggestion

but:

H2: Supplier team members will report making additional individual suggestions to improve their workplace since becoming a part of their quality team.

H3: Supplier team members will report making additional team suggestions to improve their workplace since becoming a part of their quality team.

Honda invests time and resources into developing supplier teams over time. Efforts to

change supplier members from holding a traditional view of “I make car parts.” to “How can we

make a car better?” is a change in the culture and can result in significant competitive advantages

(Barney, 2001). Overtime, such advantages can develop into unique resources (Barney, 1986b).

Investigations of citizenship behavior focus on why some employees engage in actions

beyond their normal responsibilities (Podsakoff, Mackenzie, Paine & Bacharach, 2000). Leana

and Van Buren (1999) state that rational individuals cannot be expected to engage in social

capital without expectation of benefit, even if those benefits are indirect. They do not have to be

in the form of compensation. They can be also intrinsic rewards that appeal to the individual’s

sense of accomplishment and development. Pfeffer and Veiga (1999) posit that people will work

harder because of increased involvement and commitment that comes from having more control

and say in their work. Moreover, they will work more responsibly because more responsibility is

placed in their hands as opposed to those further up in the organization. This leads to our next

hypotheses.

H4: Supplier team members will report more pride in their work as a result of their team participation.

H5: Supplier team members will report more satisfaction in their work as a result of their team participation.

H6: Supplier team members will report an increased likelihood of remaining with their organization as a result of their team participation.

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H7: Supplier team members will report an increased perception that their company is more effective as a result of their team participation.

Ultimately the goal in building a sustainable advantage that is based on leveraging

organizational social capital is to have everyone throughout the supply chain working together as

a team. Everyone in a team-based organization should feel accountable and responsible not only

for operation and success of their individual company but also for the success and operation of

the entire enterprise. Building these allegiances can take some time. Consequently, we

hypothesize the supplier team members will report a stronger connection to Honda after they

become involved in a quality team.

H8: Supplier team members will not report that being part of the Honda team was an important consideration for them when joining the quality team.

H9: Supplier team members will report that they feel that they have helped to improve Honda vehicles as a result of their team participation.

Methods

A self-report questionnaire was given to participants of the Fall, 2002, Honda Quest for

Success Competition in Indianapolis, IN. There were eight questions on the survey. Participants

responded on a one (not important) to five (extremely important) Likert scale as to the reasons

that they joined the team; the improvements that they felt had occurred since they joined the

team; and their satisfaction with their work and their company. Participants were also asked if

they had received any recognition for their work in teams and if they had received any special

training. In other questions, respondents were asked demographic questions about their age,

gender, as well as their tenure with the company. They were also asked how long they had been

a member of a quality team and number of ideas or suggestions they have made since joining the

team.

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Participants were given the two days of the competition to complete the surveys. A

folder was left at the registration table for completed surveys. In order to increase the response

rate, we had a drawing for three gift certificates to Wal-Mart. Anyone who completed a survey

was eligible. The survey was announced during the opening of the competition and at the

beginning of the second day. The drawing for the gift certificates took place after lunch on the

second day.

Three hundred and seventy-five people participated in the Honda competition. Seventy-

eight suppliers to Honda from the Midwest and Southern parts of the United States, Mexico and

Canada participated. One hundred and twenty people returned surveys. This represented a 32%

response rate.

Seventy respondents were female and fifty were male. Their ages ranged from 20 to 61,

with the average age being 41 years old. The time that the participants were employed by their

companies varied from less than a year to 20 years. The average time that people had been with

their companies was seven years. Thirty-two people had participated in quality teams for more

than four years. Fifty people had participated in quality teams for less than a year.

Results

Descriptive statistics for key survey items are presented in Table 1. As suggested in tour

first hypothesis, quality team members reported that their involvement in team activities had

resulted in new training in a variety of work-related skills. Nearly ninety percent had received

training in statistical methods or data analysis, and over ninety-one percent had received training

to help build group problem solving skills. Eighty percent reported special training in

presentation skills and communication. Combined into an additive index (where “3” represents

training in all three skill areas and “0” in none), the average respondent reports training in 2.60

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areas. Therefore, well over half of the responding quality team members have received training

in each of these skill areas.

Team members report that they have individually submitted a substantial number of

suggestions for improvements at their places of work (mean = 20.09) since joining their quality

team. It is notable that the quality of these suggestions must also be of a relatively high level. On

average 18.45 suggestions were accepted by management, or 91.8 percent of all submissions.

Similarly, the teams themselves were also generating a large number of proposals for workplace

improvements (mean = 11.12), 82.4 percent of which (mean = 9.16) were accepted and

implemented by management. These figures suggest support for the second and third hypotheses.

Quality team members are actively contributing to the continuing improvement in their

companies’ efficiencies.

Supporting hypotheses four through seven, respondents from quality teams also seem to

have a broadly positive impression of the impact of their teams on their personal work

experience and on the performance of their company. Indeed, less than six percent felt it was

“not true” or only “slightly true” that their feeling of pride in their work had increased since

joining their team, while over 72 percent felt that statement was “very true” or “extremely true”

of them. Similarly, team members reported their work was more satisfying, and that they felt

more likely to stay with their employer as a result of their participation. Respondents also

reported positive feelings about the impact of their work of their teams on the overall

effectiveness of their companies.

The success that Honda has had in building motivation and loyalty among its suppliers is

somewhat higher than we had expected. Contrary to our expectation in the eighth hypothesis, the

desire to be “part of the Honda team” was reported by our respondents as one of the leading

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reasons they decided to become involved in their team (although the desire to solve problems

and to help their company were the two most important motivations). As expected in the final

hypothesis, however, team members are extremely enthusiastic about the impact of their efforts

on the final consumer product – Honda vehicles. While a small minority (15.4 percent) felt it was

“not true” or only “slightly true” that Honda products were improved as a result of their quality

teams, nearly two-thirds (64.2%) felt it was “very true” or “extremely true” that Honda

customers received a better product as a result of their teams’ efforts.

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Table 1 Descriptive StatisticsN Std.Dev.

Skill DevelopmentStatistical/Data Analysis (percent “yes”) 89.90 119 .30Group Problem Solving (percent “yes”) 91.60 119 .28Presentation Techniques (percent “yes”) 80.00 120 .40Total Skills (0 = none; 3 = all) (Mean) 2.60 120 .8240

Individual SuggestionsSuggestions submitted (Mean) 20.09 121 33.23Suggestions accepted (Mean) 18.45 121 33.80

Team ProposalsFormal proposals (Mean) 11.12 121 22.39Proposals approved (Mean) 9.16 121 27.00

Benefits (1 = Not True; 5 = Extremely True)I take more pride in my work. 3.92 119 1.00My work seems for satisfying. 3.57 119 .89I am more likely to stay with this company.

3.73 120 .97

My company is more effective 3.43 120 .91I have helped improve Honda vehicles. 3.69 117 1.16

Motivation for joining a quality team(1 = Not Important; 5 = Extremely Important)

to be part of the Honda team. 3.72 116 1.21to be with my friends 2.54 118 1.32to gain recognition 3.08 118 1.25to solve problems 4.47 120 .70to help the company 4.22 118 .93for job advancement 3.28 117 1.34

Discussion

In competitive, technology-intensive global markets, competitive advantage can only be

achieved through resources that are valuable, rare, and difficult to imitate. One method to

acquire these resources is to go into the marketplace and acquire tangible innovations. However,

these innovations often provide just temporary advantages because other companies are quick to

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copy. Another way to achieve competitive advantage is to adopt processes that are unique and

bundled together so it is difficult for competitors to duplicate.

Managing people throughout the supply chain is one way to achieve sustained

competitive advantage. There are many reasons why building up organizational social capital

provides benefits for the firm. Companies that place workers at the core of their strategies

produce higher long-term returns to shareholders than their peers (Blimes, Wetzker & Xhonneux,

1997). Other studies have shown that there is a significant relationship between placing value on

human resources and firm survival and performance (Pfeffer & Veiga, 1999).

So why don’t more firms try to manage their social capital? One reason is that it is a

long-term process. Many managers are pushed into solving problems with short-term answers.

Another reason is that many organizations still do not see the connection between how they

manage their people and the profits they earn. Of those that do understand the connection, only

one half persist with their practices long enough to see the results. As a result, it is estimated that

only 12% of organizations that actually put into place human resource activities within their own

firms will build profits (Pfeffer & Veiga, 1999).

Managing people throughout the supply chain is even more difficult. Demanding that

suppliers cut costs, be more efficient, and provide better quality is the traditional method that

organizations have used. In response, suppliers have automated, instituted just-in-time practices,

used electronic data instruments, and installed lean manufacturing processes. Nevertheless, these

tools have all been copied by competitors and no longer provide a competitive advantage.

The next opportunity appears to be handling people throughout the chain. Honda has

tried to incorporate practices that encourage teambuilding, training and increased employee

involvement. They are being rewarded. People involved in the Circle Assistance Network are

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more committed to their work, more satisfied as employees, and more apt to take pride in their

work as a result of their team activities. Supplier companies benefit because teams find and

solve problems within the company and report to be more likely to stay with the company.

Nevertheless, managing social capital still poses difficulties for Honda. First,

participating in a quality team is voluntary and not everyone participates. Currently people who

join teams appear to be predisposed to want to be part of the Honda effort. Managers need to

find the reasons why some people do not participate so that they can provide incentives to join.

In addition, some suppliers are not as helpful in assisting their employees to work in

quality teams. A common complaint that we heard at the competition was that companies did

not give employees any time during their shift to work on solving problems. As a result, some

workers had to come to work an hour early or stay an hour later to work in their teams. This

shows the dedication of the team members. At the same time, it also shows that some suppliers

do not value the efforts that workers are making. This is surprising given that most of the

solutions saved the companies thousands of dollars by correcting inefficiencies throughout the

plant. Honda needs to continue educating their suppliers and providing incentives to encourage

more active participation. This is especially true during downturns in the economy when

organizations are prone to “cut” any program that does not give immediate financial payback.

Most advantages do come easily or cheaply. Sustained competitive advantage is about

organization learning. It is based on an understanding of organization processes, structure, and

outcomes. It is learning how to fit the tools to the company’s mission, vision, and strategy.

Managing social capital shows promise for giving managers a method of achieving advantage

but it will not come quickly or without cost.

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As with most studies, this research had limitations and offers suggestions for future

study. First, the participants in this study were members of the quality teams. To get a more

complete picture of the process, one needs to study the host organization (in this case Honda),

top management of the supplier companies, and employees of the suppliers who chose not to

participate in a quality team. Second, this study needs to be replicated over time to observe if

advantages are retained over a period of years (Barney et al., 2001). Finally, many of these

suppliers supply parts for more than just Honda. They supply parts for companies such as

Toyota and General Motors. This suggests a comparison of the supply chain management

practices between and among firms would further research in the field. Finally, Rouse and

Daellenbach (1999) recommend that intangible resources, such as managing social capital,

should be diagnosed via qualitative methods. They suggest that because culture involves tacit

knowledge, organizational members cannot easily communicate culture’s role in developing a

sustainable competitive advantage. Hoskisson, Hit, Wan and Yiu (1999) expand on this view by

recommending that future studies should include multiple approaches.

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