European Journal of Purchasing & Supply Management 8 (2002) 71–82

A conceptual model for managing long-term inter-organisational

relationships
Paul D Cousins*
Centre for Technology and Innovation Management (Centaim), School of Management, University of Bath, Claverton Down, Bath,
Somerset BA2 7AY, UK
Received 30 June 2000; received in revised form 12 March 2001; accepted 23 March 2001

Abstract

This paper will discuss the concept of relationship development. It will argue that whilst existing literature focuses on an economic
power relationship this is incorrect. The focus should be based on a concentration on the trade off between the level of dependency
that a firm is prepared to accept, compared to the level of certainty that they perceive to be realistic.
The paper will explore the literature on relationship management and will take several established frameworks and argue that
whilst they have substantial merit their focus is not helpful to relationship implementation and management. A conceptual model is
presented which provides a different way of viewing relationships using the theoretical concept of ‘game theory’. This paper suggests
that relationships are processes and not entities. As such the unit of analysis should be at the product, service or commodity level
and not at the firm level. The approach suggested whilst conceptual, has been developed from several years of research with a variety
of firms across a range of industries; some case studies will be used to illustrate the applicability of the framework. r 2002 Elsevier
Science Ltd. All rights reserved.

y an old woman was walking along a frozen
path and came across a snake, frozen solid. She
took the snake home and laid him by the fire and
nurtured him back to health. One day when the
woman was feeding him he turned around and bit
her! As the women was entering a coma before
death, she asked the snake why he should do such a
thing after she had taken care of him, to which the
reptile relied, you knew I was a snake when you
helped me!
1. Introduction and arguments
Hines, 1994; Hines et al., 2000). The applications of
these strategies have caused dramatic changes in the
nature of the relationships between firms, from a
traditionally widespread range of suppliers towards
fewer suppliers and therefore a greater degree of higher
dependency and complex relationships (Cousins,
1999b). It is with this focus in mind that this paper
examines the basis of how organisations can manage
such complex interactions; a conceptual framework,
based on Game Theory is developed as a way for firms
to think about how to select and manage competitive
collaborative relationships.
This paper sets out to argue the following key points:

The literature on inter-firm relationships has grown
consistently over the past few years. Academics and
practitioners have realised that in order for firms to
become flexible, adaptable and efficient, they must focus
their resources on managing the supply process. This
approach has led to firms operating strategies such as
Outsourcing (Wilcox et al., 1997), Supplier Delegation
(Cousins, 1999a) and Supplier Tiering (Lamming, 1993;
* Partnership relationships do not exist. Rather there
are ranges of varying collaborative relationships, all
of which are competitiveFa point supported by
other authors in the field.1
* Organisations do not trust each other, they manage
risk based on business case decisions.
* A ‘relationship’ is not an entity; it is a process. Like
any process it needs to be focused on a definable

*Tel.: +44-1225-826909; fax: +44-1225-826473.

1
E-mail address: p.d.cousins@management.bath.ac.uk (P.D. Cou- A point supported by other authors such as Cox (1996) on his work
sins). on relational competencies.

0969-7012/02/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 6 9 - 7 0 1 2 ( 0 1 ) 0 0 0 0 6 - 5
72 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82
outcome. That outcome can range from cost savings
through to joint product development and problem
solving. Once the focus (output) is decided the
appropriate relationship can be developed.
2. The development of a conceptual model for relationship
management
There is a wide range of literature written on the
subject of relationship management. This literature is
very eclectic in its nature covering areas from econom-
ics, strategy and game theory to organisational beha-
viour. This development can be traced to several
research areas, a factor which presents some problems
when attempting to order the development process.
Table 1 offers a summary of the main literature areas.
The main focus of the literature can be divided into
two broad perspectives: firstly, a behavioural or
humanistic school of thought. Authors here take the
view that relationships between firms can be viewed on
the same basis as human inter-personal relationships,
which are based on trust, mutual understanding and co-
operation, the adage that ‘‘relationships are like
marriages’’ is often used.2 The second broad school of
thought is that of an economic perspective. Here
authors believe that inter-firm relationships are based
on economic power exchanges brought about by the
differing sizes of firms and therefore economic power
within the market place.3
These perspectives are useful in providing a way to
think about relationship management, however they do
not provide answers to many of the scenarios that exist
in the ‘real world’, for example, why are some very small
organisations able to hold large companies to ransom?
This situation can be seen particularly in high technol-
ogy areas, such as software design, consultancy services
and research and development houses (Kay, 1993; Child
and Faulkner, 1998). This type of opportunistic
behaviour4 is also witnessed in other industries such as
automotive, aerospace and retail. It is suggested that the
economic size argument does not appear to explain
firm’s behaviour, therefore a different perspective is
needed. There has been some developmental work on
this problem in the area of game theory (Axelrod, 1984;
Dixit and Nalebuff, 1993; Nalebuff and Brandenburger,
1996; Axelrod, 1997). This work, however, has pre-
dominantly looked at the interactions between firms and
does not focus on key business relationships themselves.
2 5
See Ford and Farmer (1986), also Chao and Scheuing (1992) at
First PSERG conference, Glasgow, 1992.
3
This view was first popularised by Porter (1980) and was later used
as the basis for the majority of discussions on relationship theory and
approaches.
4
Term first used by Williamson (1975) to describe the strategic
interaction of firms within markets.
In order to be able to develop a strategic approach to
managing complex relationships, it is necessary to
gain an understanding of the key factors that influence
them.
The development of the collaborative relationships
literature suggests that the much vaunted ‘partnership’
approach has been brought about by firms’ needing to
reduce costs, following changes in the world’s industrial
and economic climate that have taken place over the last
three decades. The worldwide recession of the late 1980s
and early 1990s has forced firms to look at adding value
and reducing cost throughout their entire business. This
change has brought about large-scale redundancy
programmes or ‘down-sizing’, cost reduction drives,
quality improvement initiatives and inventory reduction
programmes (Schonberger, 1986, pp. 155–160; Womack
et al., 1990; Womack and Jones, 1996). Managers have
been forced to look at new and different methods of
adding value, either through improved performance of
their product or through the development of the ‘service
package’ (Normann, 1984) and service delivery system
that surrounds their product. Womack et al. (1990)
discuss how automobile manufacturers are using the
service element of their business to build competitive
advantage by ascertaining customers’ future require-
ments, and making them part of their product develop-
ment programme5 (Voss, 1992; Womack and Jones,
1996). The key factor of competition, on a global scale,
has been that firms have been prevented from passing
cost increases onto the consumer in the form of
increased market prices (Steudel and Desruelle, 1992).
Western firms who have looked at the success of their
Japanese counterparts have seen how they reduce costs
with closer working relationships with their suppliers.
They have decided that this must therefore be the way
forward (Burt and Doyle, 1994). However, the major
theme that is indicative of the current business environ-
ment is that firms must reduce their overall costs in
order to survive and compete.6 This approach suggests
that relationship development should be based on a
sound business case not on a utopian ideal of working
better together; as Milton Freidman said, ‘‘the business
of business is business’’.
This apparent dichotomy, between short-term price
reduction and long-term collaboration, occurs because
of a misunderstanding by western firms of the very
nature of the partnership philosophy itself. The philo-
sophical underpinnings of partnering are not based on
Japanese culture. They originate, in their most recent
For an interesting discussion on manufacturing operations operat-
ing as service organisations, see OMA Conference Paper of Voss
(1992).
6
Firms often view cost and price interchangeably; however a price
focused strategy will reduce the suppliers margins, where as a cost
focused approach examines the cost structure of the products or
services being purchased and looks for ways to reduce them.
 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82
Table 1
Summary of Literature Review on Relationships
Literature area
Theory of the firm and
of inter-firm subcontracting
Purchasing and supply
literature
Sub-group Author
Antecedent literature Plato (347 BC) Aristotle
(322 BC)
Physiocrats (17th century)
Smith (1776)
Marx (1867)
Neoclassical theory Marshall (1890)
Salter (1980)
Transaction cost Coase (1937)
economics
Williamson (1975, 1985, 1986,
1991)
Sako (1990)
Nishguchi (1994)
Dyer (1997)
Criticisms of TCE Klein et al. (1978)
Ghosal and Moran (1996)
Martinez and Dacin (1999)
Resource based theory/ Penrose (1959)
specialisation theory
Andrews (1980)
Demsetz (1993)
Teece (1997)
Behaviouralist literature Cyert and March (1963)
Marketing perspective Van de Ven et al. (1975)
Kiser (1976)
Jain and Laric (1979)
Hakansson (1987)
Turnbull and Ford (1996)
Olsen and Ellram (1997)
Strategic supply Baily and Farmer (1981)
Owen (1985)
Farmer (1985)
Reck and Long (1988)
Caddick and Dale (1987)
Laneros and Monckza (1989)
Porter (1980)
Reid (1990)
Cousins (1995)
Carr and Smeltzer (1999)
Modern supply chain Houlihan (1987)
management
Ellram (1991)
Berry et al. (1994)
Tan et al. (1998)
Carlisle and Parker (1989)
73
Contribution
Efficiency from specialisation
Surplus (capital acc.)
Division of labour, market transactions
Reciprocally separate groups (firms)
Equilibrium analysis
Firm operates to marginal point
Firm as a unit of analysis, transaction costs
The nature of transactions, bounded rationality,
asset specificity, vertical integration
ACR/OCR, trust
Asset specific contract assembly/supply
Asset specificity in auto industry supply
Quasi-rent and post-contractual opportunistic
behaviour
Internal efficiency of firms
Influence of external regulatory factors
Firms have specific assets used for competitive
advantage
Distinctive competence
Reduction in TCE causes firms to subdivide
Leverage firm’s internal resources
How firms make decisions in a market system
People, not organisations, have goals
Buyers choose between horizontal and vertical
market relationships
The need to meet a price target defined by the
marketing function drives purchasing strategy
Transactions influenced by atmosphere and
environment
No such thing as the individual transaction
Purchasing and marketing are mirror images
Operations based, preceded strategic supply
A total cost, longer term approach to purchasing
Supplier selection critical to firm’s success
Four stage model of the development of the
purchasing function
Purchasing objectives must be aligned with firm
strategy
Use Porter’s model to support strategic role of
purchasing
Five forces model, including determinants of
buyer and supplier power
Conceptual framework to focus on purchasing’s
supportive role
Purchasing as a function becomes more strategic
Three indicators of strategic purchasing
Supply chain as a single entity
A network of firms delivering product or service
to the end customer
Supply chain management aims to release
management resources for developing long-
term relationships
How firms utilise their suppliers’ processes,
technology and capability to enhance
competitive advantage
Partnerships between customer firms and
suppliers. Three stage model
74 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82

Table 1 (continued)

Literature area Sub-group Author Contribution

Burt and Doyle (1994) Advocate incorporation of elements of the

MacBeth and Ferguson (1994)
Laneros et al. (1995)
Cox (1997)
Parker and Hartley (1997)
Cousins (1999a)
Japanese keiretsu
Advocate single (or dual) sourcing for its cost,
quality and efficiency gains
A systematic approach to managing partnerships
Collaborative approach is not necessarily more
effective than competitive
Firms not entering long-term
partnershipsFdependency rather than
partnership
In supply base reduction, firms must take account
of strategic and managerial as well as
transaction costs

Auto industry specific literature
Supplier relations and Womack et al. (1990)
strategy in the auto
industry
Lamming (1987, 1993)
Helper (1991)
Sako et al. (1995)
Wolters and Schuller (1997)
Ali et al. (1997)
Brandes et al. (1997)
Leverick and Cooper (1998)
Mudambi and Helper (1998)
Calabrese (2000)
Toyota production and procurement system with
tiering
Four stage model of procurement, post-Japanese
model of component supply, tiering, lean
supply
Voice and exit supplier relationships
Companies with better partnership relations
outperform
Move to supplier sourced pre-assemblies in
European industry. Complete systems
purchasing a strategy for competitiveness
Supply strategies of Europeans heavily influenced
by Japanese practices
TCE cannot explain move to outsourced sub-
assemblies
Supplier responsibility for design now prevalent
Close but adversarial model
Propensity of buyers to reduce fixed costs and
investment rigidity

Outsourcing and strategy Strategy Porter (1980) Benefits and risks of vertical integration
literature
Prahalad and Hamel (1990) Core competency growth focus of firms
Outsourcing Venkatesan (1992) Principles of outsourcing, unit of analysis
Quinn (1994) Knowledge based outsourcing
Chesbrough and Teece (1996) Risks of inadvertently outsourcing true
competencies
Lonsdale and Cox (1998) Review of factors driving outsourcing

form, from Deming’s (1986) 14 points on quality,7
which were developed in the late 1940s. Deming argued
that firms should work more closely with fewer
suppliers, to enable clear and unambiguous commu-
nication flows to take place, allowing buyer, supplier
and customer to realise the maximum amount of
synergy from their relationship, and therefore achieve
competitive advantage for all parties involved in the
transaction (MacBeth and Ferguson, 1994). The Dem-
ing ethos is based on timely and acceptable inputs to the
organisation: that is to say a concentration on produc-
7
Deming’s fourth point discusses working closer with fewer
suppliers to ensure on-time delivery, at acceptable price and acceptable
levels of quality.
tivity and efficiency and not on profitability per se,
something which currently appears to be the main
driving force for western firms in the adoption of this
approach. A concentration on productivity and effi-
ciency will, according to Deming (and substantiated by
the subsequent success of Japanese companies today)
(Womack et al., 1990), lead to overall improvement
levels in long-term sustainable competitive advantage
and profitability (Nishguchi, 1994).
3. The changing role of purchasing to supply
The development of the partnership approach and the
drive to reduce cost and add greater value has led firms
 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82
to reconsider the role of the purchasing itself. Purchas-
ing has traditionally been seen as a service department
performing no real ‘strategic’ role (Caddick and Dale,
1987). Numerous studies have been conducted on the
strategic importance of purchasing and supply to the
organisation, ranging from Farmer (1978), Farmer
(1981a, b), Spekman and Hill (1980) and Van Weele
(1984) to Cavinato (1991). These studies have tended to
be conceptual (Spekman, 1981; Browning et al., 1983;
Burt and Soukup, 1985). However, recent studies have
exhibited a large amount of empirical evidence support-
ing the argument that purchasing should be viewed as a
strategic function (Laneros and Monckza, 1989; Carl-
son, 1990; St John and Young, 1991; Hines, 1994;
Nishguchi, 1994; Cousins, 1999a). It is clear from this
literature that the role that purchasing plays within the
organisation is now changing: purchasing as a function
is becoming more strategic with smaller numbers of
highly qualified buyers, decentralised control of non-
value adding items and greater planning activity
horizons. The strategic process of supply management
is replacing the function of purchasing.
In addition to this change, the educational and
demographic structure of the purchasing department is
also changing (Cousins, 1993; Cousins and Rutter,
1998). Purchasing personnel are now better qualified
and more professional in their outlook and approach to
the task.
Furthermore, the same research shows that the
structure of the function is also changing. The size of
purchasing departments has reduced significantly from
an average of between 50 and 60 buying personnel (in
medium to large sized organisations) in 1980 to an
average of approximately 15 strategic supply personnel
in the late 1990s (Cousins and Dooley, 1994; Cousins
and Rutter, 1998). This change is often combined with a
decentralised purchasing strategy approach, where
strategically important contracts are centralised at head
quarters and non-strategic important procurement is
devolved to the various satellite plants and divisions. As
one purchasing director put it:
At British Sugar we only have ten buyers for the
entire business, and in fact they are not called buyers,
they are called ‘Purchasing Programmes Managers’.
They are all qualified to at least degree standard, and
it is their job to oversee strategic policy making
decisions for all purchases within the businessyDay
to day procurement is handled by administrators at
plant level, who ‘call off’ from blanket five year
contracts which have been negotiated by us. We only
handle contracts of a value greater than d125,000y8
8 12
Andrew Wilson, British Sugar, Peterborough, taken from Cousins
(2000).
75
It is important to note that such strategic changes
cause distinct managerial problems. As Quinn et al.
(1988) note strategic movements take place in a step-by-
step manner or, as they term it, ‘logical incrementalism’.
It is therefore vitally important when considering the
implementation of any new strategy that the internal
infrastructure is firmly in place. This concerns both the
internal resources, such as the correctly qualified
personnel, and also the relevant management systems
and philosophies.
The central concept of a relationship approach is
concerned with the collaboration and sharing of
resources, either physical (such as machinery) or
intangible (such as intellectual know-how, technological
processes)9 as well as the primary goal of gaining
competitive advantage through improvements in pro-
duct and process redesign, making both firms more
efficient in the supply of the end product.10
Authors such as Sako (1990), Dore (1987) and
Lamming (1993), point out that a portfolio of relation-
ships is essential; MacBeth and Ferguson (1994, p. 106)
place relationships on a continuum ranging from
vertical integration to the pure market. The type of
relationship operated will naturally depend on the
parties involved, the external environmental conditions
(Burt and Doyle, 1994, p. 5) and the overall willingness
to enter into such an agreement. Interestingly, Sako
(1990) uses Williamson’s (1975, 1985) framework to
analyse inter-organisational relationships,11 leading her
to develop the arms-length contractual relationship
(ACR) and obligations contractual relationship (OCR)
models.12 Sako (1990) also develops the idea of trust, in
an economist’s sense, defining it by using three
categories: Contractual Trust, Goodwill Trust and
Competence Trust. These can be summarised as follows:
* Contractual Trust: The trust that the supplier (or
other party) will adhere to the points of the contract
as agreed. These cover both explicit and implicit
agreements.
* Goodwill Trust: The trust that the other party will, if
required, perform tasks in excess of the agreed terms
and conditions.
* Competence Trust: The trust that the other party has
the ability to be able to produce what the contract
requires.
9
This is often referred to as asset specificity.
10
The gains in savings from this approach can be astronomical; in
one case study followed by the author a saving of 40% was realised on
a d400 million pound spent by simply focusing on the relationship.
11
Coase (1973) was the first person to develop the theory of TCE in
a seminal paper addressing this vitally important conceptFsee
reference.
Note that this work also builds on established theory developed by
Dore (1987) that examined contractual relationships.
76 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82
These definitions of trust are important and con-
venient and will be discussed in detail during the
conceptual model definition at the end of this paper.
In addition to general writers on the subject of
relationships another major school of relationship
theory was created in the late 1970s and early 1980s,
these became known as the Industrial Marketing and
Purchasing group (IMP). They use Williamson’s (1975)
transactional cost economics model and the work of
Ring and Van De Ven (1992, pp. 483–498) as the basis
for their measure of relationship development. Their
focus then, and today, is on the firm operating within a
network of relationships. The IMP group clearly
recognise the importance of business relationships and
it is their view that the entire system needs to be
considered in a holistic and systematic way, mapping the
various relationships and types of relationships in a
pseudo mathematical manner. Whilst this process is
indeed very useful in determining the type and quantity
of relationships within a given network, the measure-
ment and management of the process is again ignored.
The work of the IMP has had a growing effect on how
academics view relationship strategy, by indicating that
relationships between firms are highly complex and
inter-related through many levels of the supply hier-
archy.
4. Strategic supply and relationship management: new
paradigms
The literature review and recent research (see Table 1)
has shown that the purchasing function is now having to
adapt and adopt new strategic initiatives for the
management of the supply base, ranging from the
traditional adversarial approach through to the devel-
opment of complex inter- and intra-organisational
collaboration agreements. This paradigm shift for both
the organisation and the purchasing function requires a
change in the way that business is approached. Tradi-
tional purchasing thinking would dictate that if the
supplier is not subject to the firm’s control then it is not
going to work for the common good of both buyer and
supplier. It is assumed that the supplier will only desire
to achieve one goal: that of self-maximisation.13 In order
to prevent opportunistic behaviour buyers and suppliers
need to find ways of developing mutual collaborations,
i.e. both parties benefit from the exchange process.
MacBeth and Feruguson (1994, pp. 156–159) discuss
how this transformation can take place with the
development of the RAP-3 framework. They suggest
that change will only occur if it is viewed at both an
operational and a strategic level.
13
A view first expressed by Williamson (1975) where he referred to
suppliers as seeking opportunism with guile.
In order to build protection from suppliers and their
expected opportunistic behaviour, organisations built
up large supplier bases. This allowed them to choose
from a multitude of suppliers whenever they had a
request for parts to be purchased. The goal was to
minimise price by maintaining a large supplier selection.
It is important to note that the principal goal was
unitaryFthat of price minimisation. Buyers operating in
this traditional purchasing mode adjusted purchasing
mix by moving work around a host of eligible suppliers
on a short-term contract basis, a policy which became
known as ‘multi-sourcing’. Naturally, this prevented
suppliers from assuming that they would win the order.
In the minds of the buyers it ‘kept suppliers on their
toes’. However, this approach also prevented the
supplier from being able to plan capacity accurately
(thus obtaining economies of scale) in anticipation of
future requirements. From the suppliers’ point of view,
therefore, doing business with this type of customer
offered little or no benefits.14 The supplier was not
required or allowed to suggest innovative ideas, but had
to work to strict specifications and was subject to the
rigours of sophisticated contractual agreements. All that
the supplier could expect was a squeeze on margins. This
method of procurement, whilst it minimises price via the
request for quotation (RFQ) bidding procedure, also
has the effect of reducing quality levels, service and
delivery schedules. This ‘big stick’ approach (Lamming,
1987) will only work for a short period of time, after
which the supplier has to cut corners or look elsewhere
for business. As Deming (1986, p. 33) points out,
purchasers should:
yEnd the practice of awarding business on the basis
of price tag alone. Purchasing must be combined with
design of product, manufacturing, and sales to work
with the chosen suppliers
These ‘new’15 purchasing approaches involve the
development of partnership arrangements, or as Kanter
(1989, p. 117) calls it ‘‘becoming better PAL’s’’ (pooling,
allying and linking). Kanter suggests that these are
essential in order to operate a satisfactory partnering
philosophy. This ‘friendly’ approach to procurement
contrasts sharply with the adversarial approach, which
has traditionally been ingrained in buyers, labelled by
Hofsteader (see Kanter, 1989, p. 118) as the ‘‘paranoid
style of traditional American management’’. This
attitude has been preserved within the law with such
phrases as ‘caveat emptor’ (‘let the buyer beware’), which
14
For a recent discussion on supply base rationalisation and
restructuring see Cousins (1998).
15
Kanter (1989) describes these paradigms as new. As previously
mentioned, however, they can be traced back to the mid-1940s, and to
Deming’s 14 points.
 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82
has for so long been part of English law (although now
mostly replaced by the Sale of Goods Act 1979).
5. The Japanese effect on supply management
During the 1980s, western organisations noted that
whilst they purchased a large amount of bought-out
parts for their operations, they were considerably less
competitive than the Japanese. Furthermore, the super-
ior quality of Japanese goods and their supplier
relationships were becoming unmistakable. The Japa-
nese view of procurement clearly involved the supplier
as a ‘stakeholder’ (Cyert and March, 1963) in their
business. Cyert and March defined stakeholders as
either ‘internal’ or ‘external’ to the firm (Fig. 1). The
internal stakeholders included managers, trade unions,
etc., while the external influencers included government,
legislation, suppliers and so on. The principle behind the
‘new’ supply management approach was to consider the
supplier as part of the internal stakeholder element.
This approach dictates that the supplier will have a
profound effect on the construction and supply of the
buying firm’s product, i.e. the perceived quality and
reliability of the buying firm’s product is locked into
that of the supplying firm’s component parts. More
importantly, internal stakeholder status should give
both firms equal access to information such as build
schedules, forward plans and also limited access to
strategic market movements of the firm(s), thus allowing
both customer and supplier to act in a symbiotic way to
support each other.
Since the 1940s Japanese firms have clearly taken the
view that the component supplier has an equally
important role to play in producing the finished goods
as that of the manufacturer.
Fig. 1. The stakeholder approach to supplier relationships.
77
The Japanese recognised that the supplier was the
expert in his own field of technology and that they could
draw upon this to create synergies with their own
organisations. This model involves viewing the supplier
as ‘co-producer’, working with fewer suppliers per
customer and customers per supplier, developing long-
term relationships, managing close interaction among
all functions, sharing physical proximity, and blanket
contracts (Shapiro, 1988; Nishguchi, 1994; Cousins,
1998).
6. The strategic nature of supply
In order to implement and manage these ‘new’
strategic relationships, firms have adopted (as discussed)
a more strategic approach to supply management.
However, the application of strategies does not make a
business process strategic. Rather it is the pro-activity
and context within which these strategies are set that
produces strategic intent. If firms want to increase
competitive advantage they must go further than the
buying process, they must look at how they strategically
manage the supply process (Harland et al., 1999).
Supply refers to the management of goods and services
from the supplier(s) to the customer. It involves an
understanding of what the company sees as important,
i.e. its strategic goals and intent, the alignment of these
issues and the translation into a supply strategy.
Strategic supply is concerned with structuring the supply
base to meet the needs of the firm. For example, if the
firm needs to improve its time-to-market, increase the
innovation cycle and/or cut costs, what is the appro-
priate supply structure to deliver this? Should the firm
be operating a tier structure of supply, reduce its
oversupply base, outsource elements of its business?
These are all issues for supply management. Further-
more, the management of these strategies is also the
realm of supply. The supply process permeates
across the firm as opposed to sitting within a specific
function.
Fig. 2 represents a conceptual model of the supply
process. It argues that in order to be strategic, supply
must balance all the elements within this model. The
model is concerned with finding the most ‘appropriate’
strategy based on the key five dimensions depicted
within the model. It is the balancing of all of these
elements that the supply strategist must consider.
Selecting one or two of these elements will not deliver
a strategic response. For example, the implementation
of collaborative relationships without the requisite skills
and competencies, measurement systems, etc. will be
doomed to failure, as some firms have found to their
cost (Cousins, 1999a).
78 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82
Fig. 2. The strategic wheel of supply.
7. The development of a conceptual model for relationship
management
When examining the literature on inter-firm relation-
ships from either the behavioural or the economic
school of thought, one recurrent theme is argued
throughout. That is that the unit of analysis is the
relationship between Firms A and B. If this proposition
is examined in any detail it is clear that this focus is not
correct. Cousins (2000) found that in one case study of a
single buyer–supplier relationship in the aerospace
industry there were over 1500 interfaces between the
firms, on a variety of differing products, service and
commodities being purchased. It does not make intuitive
sense that there should be one relationship between two
firms. Each person, within the case study gave a slightly
(sometimes radically) differing perspective on what they
saw as both the ‘health’ of the relationship and the
desired outcome. The work of Lamming et al. (1996) in
generating the RAP framework suffered from this same
fundamental flaw, which is a misunderstanding of what
a relationship is and what its key focus should be.
It is proposed here that the relationship should not be
viewed as an entity. Lamming (1993) referred to it as a
‘quasi firm’, sitting between the two organisations.
These view points are not helpful in allowing firms
and academics to study this area. Relationships should
be viewed as an inter- and intra-organisational process.
Like any other process within a firm such as commu-
nication, they exist to deliver something, namely value.
It is therefore essential that firms focus the relationship
process on a definable deliverable outcome. That out-
come could manifest itself in a variety of forms,
depending on what the organisation sees as adding
Fig. 3. A dependency and certainty conceptual model of inter-firm
relationships.
value. For example, it could be straightforward cost
reduction or more complex issues such as product
redesign, innovation, improving time-to-market, etc.
The point is that the relationship process must be
focused on delivering value. Further to this point, the
focus of the relationship needs to be at the product,
service or commodity level, i.e. what does the customer
require from the supplier for the delivery of the part,
service or commodity item? This argument will mean
that it is very possible, in fact highly likely, that firms
will be operating a range of differing relationships with
one supplier. The type of relationship adopted will
depend on the level of output desired, which is generally
a calculation between the amounts of resources needed
versus the level of return anticipated.
The following model (Fig. 3) is suggested as a way of
thinking about the management of these relationships.
Whilst other authors argue (Lamming, 1993; Mac-
Beth et al., 1989a, b) that relationships are influenced by
economic power, which undisputedly has an effect on
the relationship, it is argued that this is only one factor.
Indeed it is argued that economic power is a subset of a
wider relationship influencerFdependency. The issue of
dependency and risk is widely discussed. Axelrod (1964)
was one of the first proponents of this approach
producing a game known at the Prisoners Dilemma,
this was later popularised in the 1990s by Carlisle and
Parker in their version called the ‘Red/Blue game’. The
principle of the game, however, is the crucial point,
which is that teams will collaborate if they know that the
payoff will give them advantage and they will compete
when and if they believe that they can gain an advantage
from doing so. Building on Williamson’s ideas of asset
specificity and the literature on relationship manage-
ment there appear to be four distinct categories of
dependencies: Historic, Economic, Technological and
Political (see Table 2).
The second axis on the matrix is labelled certainty.
The concept of certainty comes from the literature on
economics where it is used to support the definition of
 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82 79

Table 2
A typology of inter-organisational dependenciesa

Dependency Definition of dependency

Historic The parties have always dealt with each other, they know and feel that they can interpret each other’s movesFthey feel
comfortable with the partner even though they may not be the best. They have an established relationship that they feel
that they can build upon
Economic Economic size, one or other party is a significant market player, they maybe the market leader or significant follower. One or
other party has invested significantly in terms of switching costs, i.e. tooling, joint training, information
technologyFCAD/CAM, etc.
Technological One or other party has a distinctive process capability or product capability that the other requires. Therefore the partner is
seen as significantly adding to the others business. In addition, there could be the possibility of joint product development
by linking together technologies and approaches to produce a new product or processFsynergistic technological
competitive advantage
Political One or other party has to deal with the other due to either external environmental or internal organisational pressures. For
example in aerospace and defence firms are often obliged to deal with home manufacturers. (In one of the case study
examples 80% of supply is from the home market.) The USA has ‘Buy American’ laws, small and disadvantaged business
legislation, etc.
a
Developed with grateful help from Max Warburton, M.Phil. Student, School of Management, University of Bath.

Table 3 In order to construct the model, the definitions of

Trust versus risk
Trust Risk
Knowing they will do what they Fear of the unknown
said that they would
Having faith Unpredictable
A willingness to participate Chance of failure
An understanding Take advantage
Being predictable Unprotected
‘risk’, i.e. how certain versus uncertain is the same as the
probability of success or failure of a given event. The
relationship literature (see Table 1) refers constantly to
the issue of ‘trust’ within relationships. However, the
term is never clearly defined and certainly not oper-
ationalised. Sako (1993) has developed the closest
workable definition of trust by defining it (using an
arms-length and obligational contracting continuum)
into three distinct categories. These categories are very
useful and will be built upon to form the next dimension
of this model. When examining the literature and also
the comments made by practitioners on relationships
there is a clear distinction between what they view as
trust and what they view as risk. Ironically they appear
to be the same thing, just different ends of the spectrum,
with trust tending to be ‘positive’ and risk tending to be
‘negative’. Table 3 illustrates this point.
These views have been backed up on numerous
occasions with discussions with a variety of students
and managers. It is clear that trust is seen as predictable
and safe and risk is seen as unpredictable and therefore
not safe. Further to this argument is how risk averse or
risk taking the firm is. This will naturally be based on
the level of reward perceived from the transaction.16
16
A concept discussed in the literature on risk and referred to as
utility curves.
Sako were used as they provide a convenient positive
and negative spectrum to classify risk or certainty types.
In addition to the Sako definitions, the added dimension
of political certainty was also added. It was clear from
the literature that this was an area of concern for most
firms and it had a direct effect on the level of risk that
the customer or supplier was prepared to take. This
category was concerned with a range of issues, namely
the management of internal political concerns such as
adhering to organisational local sourcing policies, as
well as wider external political issues, i.e. customer
specified sources.
It is important to note that this model and these criteria
are equally applied to the customer and supplier, and that
they focus on a specific product or service, not the
organisation in general. Table 4 outlines the key dimen-
sions of certainty and gives a brief description of each.
The purpose of this model is to allow relationship
strategies to be positioned across a range of dimensions
from both a customer and supplier perspective. When a
firm realises the type of relationship that they currently
have, they can then make the decision to either change
or maintain it. The model allows firms to alter the
relationship based upon the two key dimensions
indicated, i.e. if high levels of one-sided dependency
exist it may be in one or other of the parties interests to
alter this by manipulating the dependency situation, for
example, by instigating a risk and reward sharing
agreement. The key point is that it focuses the firms to
consider the relationship that they have and the
relationship that they require, based on a business case
scenario. Having identified the current relationship the
firm(s) can then make a strategic decision to either alter
it or leave it where it is.
It is clear from the literature and case examples that
firms will consider the relationship aspect as important
but often unconnected to the output of what they may
80 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82
Table 4
A typology of inter-organisational certainties
Certainty Definitions of certainty
Contractual How certain are the parties that one or other will perform to the specifications of the contract?
Competence How certain are the parties that one or other has the capabilities to perform to the contract? e.g. the required levels of skills and
competencies, technological capability, etc.
Goodwill How certain are the parties that one or other will be willing/or not, to go beyond their contractual duties and help the other
should they need it
Political How certain are the parties that the other is able to fulfil any internal or external political issues? e.g. protection of data,
intellectual property, etc.
expect. This model forces firms to connect the deliver-
able output to relationship type that will deliver.
Further, it is also possible to overlay on the matrix a
range of skills and performance measures that would sit
in each quadrant. This will allow the firm to see if the
desired strategy is obtainable to them.
When using this approach firms are asked to indicate
which types of dependency and certainty they feel are
more and less important. This is an important approach
as it facilitates a discussion on the relative merits and
issues that the various team members consider when
looking at the relationship. One of the case study
companies used this approach on a major procurement
project. The customer was under the impression that
they were not dependent on the supplier and the supplier
was dependent upon them. After running the analysis it
appeared that this was not the case, in fact the situation
was the reverse. This revelation immediately evoked a
change in the behaviour of the customer firmFthey
began to explore ways of creating a mutual dependency
situation.
The major driving principle of game theory is that a
‘tit for tat’ approach is the most successful game that
any two firms can play; in addition, the principle that
firms are foremost maximisers and secondly satisfiers
(Cyert and March, 1963) explains why firms will always
resort to opportunistic behaviour when they are able
too, what stops them will be the fear of ‘tit for tat’. If the
supplier and customer understand this approach then
the range of options open to the firms to collaborate are
limitless, as the relationship will be based on a
competitive action within a collaborative framework.
The model shows that when either firm is in a
situation of high uncertainty (high levels of risk),
depending on the dependency situation either a tradi-
tional relationship will prevail or, if either party is
dependent on the other an opportunistic strategy will be
followed. In box A, the dependency is one-sided and
high and the levels of certainty are low, i.e. uncertain.
Therefore, the firm in a weaker position must either look
for ways to increase levels of certainty and mutual
dependency through a differentiation strategy, risk and
reward schemes, etc. This would allow the relationship
to move from box A to either C or D. Alternatively, they
could try to become independent and move towards box
B. The research highlighted two examples of this. The
first was in the aerospace industry where an OEM
purchased large amounts of aluminium from one source.
The OEM wished to develop the relationship but the
supplier refused. The OEM was dependent on the
supplier but the supplier was not dependent on the
OEM: a one-sided dependency. In addition, the OEM
was unable to give long-term commitment to the
supplier due to order book constraints and also to a
general lack of enthusiasm to realise this information. In
order to resolve the situation the OEM decided to do
two things, to explore with the supplier a joint initiative
using their technologies to develop ‘new’ composite
materials (thus increasing the dependency) and also a
wider view of future orders and planning cycles
(increasing certainty). This approach moved the rela-
tionship from box A towards box D. A second case in
the nuclear industry had a similar problem and was tied
to a major supplier. They attempted to try and work
with the supplier but to no avail, primarily because the
customer could not offer a differentiated approach. The
customer decided to resource and after several years has
now managed to do so, he has moved into box B and is
currently attempting to regain some of his losses
through tight contractual agreements.
Boxes C and D represent two distinct modes of
collaboration. Tactical collaboration refers to working
with several suppliers and focusing mainly on the
certainty element of the relationship and focusing on
process improvements, such as inventory policy, im-
provements in quality and so on. The ‘Strategic
Collaboration’ box refers to very close collaborations
that are generally focused on long-term product rede-
sign, joint technology developments and joint business
ventures. The key issues here is maintaining the mutual
dependency, this is usually sustained by focusing on a
technological dependency.
8. Conclusions
This paper has presented an alternative approach to
viewing relationship strategy, it has explored the past
 P.D. Cousins / European Journal of Purchasing & Supply Management 8 (2002) 71–82
and current literature and has suggested that in order to
build long-term relationships that last, a competitive
and collaborative approach needs to be considered.
This paper has suggested that in order to conceptua-
lise our thinking of relationships we should not think of
them as entities but rather as a process. As with any
process it will need to deliver an output of some
description. Some of these outputs will be complex, such
as increased innovations, total cost management, cycle
time reduction, etc. and others will be simple, i.e. price
reductions, delivery improvements, etc. The issue is
about choosing the correct relationship process to
deliver the desired output. There is no point in having
complex relationship processes if the output is relatively
simple. For example, why form collaborations when all
that is required is a price reduction and of course the
converse is also true. Further, it is suggested that the
concepts of dependency and certainty play a key role in
influencing relationship processes. By adjusting these
axes it will be possible to alter the focus of the
relationship from higher to lower levels of collaboration.
This is also dependent upon the level of mutuality of
dependency that can be adjusted through time.
This paper takes the view that companies are in
business to make money (private sector) or to save
money (public sector), either way they will want to
maximise. Therefore the issue here is not about trust,
but rather how to optimally manage the situation.
It must be remembered that all firms are ‘snakes’; they
are maximisers and satisfiers concerned with their own
survival and self-interest. If that self-interest is best
served by working closely with another firm then they
will do so. However, when that interest is no longer
served, rest assured, they will bite you!
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