Kelvin Junhan Goh and Dr. Nile W. Hatch, Strategy Dept

The business world which we live in today is constantly pursuing new avenues of growth. Corporations try to gain a competitive edge or advantage over other industrial rivals, with cost-cutting a huge emphasis in the recent years. Although the idea might go against the grain, there is a place in today’s business arena for trust between buyers and suppliers. Scholars have discussed and written about this form of trust, which is meant to replace contracts and other forms of transactional agreements. Journal articles have been written on advanced supplier relationships that are built solely on trust, but none of them delve deeply into the question of how to start such a supplier-buyer relationship.

My main aim in writing this thesis was to (1) define and describe the fundamental components of relational trust; (2) evidence the possibility of forming an advanced supplier relationship through game theory, despite the hindrances of stifling buyer/supplier competition prevalent in today’s business environment; (3) elucidate several factors necessary to successfully build trust within a supplier partnership.

I greatly enjoyed doing research into the things that have already been said and written about this subject. My mentor and Prof. Dyer of the Marrriott School were both highly involved in this area of relational trust in business relationships, and thus I read several of their articles, as well as those from other scholars. I based my foundation on past research; I built on the definitions composed in previous theses. For example, I based my definition of trust on a rubric of benevolence, reliability and competence, while tweaking the model somewhat. My perspective on trust was that suppliers and buyers alike needed all three criteria to be fulfilled before they can develop a relationship of trust with each other.

I gauged the various aspects of trust and concluded that there were order-winners and minimum qualifiers in terms of the attributes of the supplier/buyer. I argued that competence is a minimum qualifier and that the other two key characteristics of trust would be superfluous if a supplier was not competent in delivering the goods sought. But the key order-winner, or the attribute that builds the most trust in the long run is benevolence. The ability to accommodate and flexibly work with the other party, even if it means sacrificing some profits, is, is deemed to be one of the best building blocks of trust.

In order to develop game theoretic models that can illustrate the tradeoffs between trust and mistrust, I compared and presented the different arguments for and against trust in a relationship. For instance, drawing upon past research, we can see that trust supersedes contracts and thus there is less transaction cost involved, i.e. less lawyer fees to draw up explicit contracts. Also, the search costs and enforcement costs are minimized because the trust-based system put in place uses the threat of discontinuing as a way to prevent others from taking advantage of the situation.

Game theory then suggests that when this game between the supplier and buyer is played out once, or just for a definite period of time, both the buyer and supplier have incentives to act in self-interest. However, when the time horizon is extended to infinity, repeated game theory then suggests that both parties should stay within the trust framework, since both of them would reap extra-ordinary gains if they would but collaborate.

Although there is definitely a need to gather empirical results, I hope I have built a model on which future research can be based. The key takeaway would be that companies should actually look towards setting up trust-based supplier and buyer relationships, and commence on building the tools necessary for this. There are considerably more benefits than drawbacks to forming a relationship on trust that it almost seems inevitable that such cooperation succeeds if one tries. The potential for costs savings from holdup costs and transaction costs, and the ability for a partnership to better explore new advances in technology, all lead to a competitive advantage for the partnering firms.

Proin ultrices diam sit amet dolor. Suspendisse nunc. Fusce vitae ante vel eros pulvinar egestas. Proin malesuada aliquet turpis. Suspendisse fermentum wisi eu nibh. Integer nunc risus, aliquet at, semper interdum, euismod vitae, lorem. Ut arcu orci, aliquam vel, tristique eget, nonummy a, lorem. Donec posuere pharetra purus. Quisque mattis mi vel lectus. Nulla vitae nunc at magna pharetra blandit. Curabitur elit urna, scelerisque vel, dignissim sed, iaculis ut, enim. In hac habitasse platea dictumst. In congue, wisi id elementum rutrum, lectus lorem ultrices mi, eu imperdiet lectus mauris lobortis sem. My final suggestions for companies that wish to commence a trust-based relationship with their suppliers or buyers, was based on the findings of the game theoretic model. Such firms should do all that is necessary to initiate a long-term, iterated game. The two parties need to initiation cooperation, establish credible threats which help avert the possibility of cheating, and elucidate to the other party the long-term benefits of cooperation.

I have greatly enjoyed working through this project / thesis, and have successfully defended this thesis before a panel of Honors advisors. I am grateful for the ORCA office for giving me the chance and the resources to pursue an Honors project, culminating in this thesis.