Gaining Strategic Advantage: Managing Social Capital in the Supply Chain
Robert R. Wharton and Linda E. Parry
Western Kentucky University
Department of Management
1 Big Red Way
Bowling 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.email@example.com, 270-745-6376 (fax)
Gaining Strategic Advantage: Managing Social Capital in the Supply Chain
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
Gaining Strategic Advantage: Managing Social Capital in the Supply Chain
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.
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
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
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.
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.
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.
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.
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
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
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
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
and training acquisition; involvement in teams; satisfaction with their company; and attitudes
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
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
continually, we would hypothesize that team members would not be just making one suggestion
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
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.
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.
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
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
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%
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.
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
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
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
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.
Table 1 Descriptive Statistics
Statistical/Data Analysis (percent “yes”) 89.90 119 .30
Group Problem Solving (percent “yes”) 91.60 119 .28
Presentation Techniques (percent “yes”) 80.00 120 .40
Total Skills (0 = none; 3 = all) (Mean) 2.60 120 .8240
Suggestions submitted (Mean) 20.09 121 33.23
Suggestions accepted (Mean) 18.45 121 33.80
Formal proposals (Mean) 11.12 121 22.39
Proposals approved (Mean) 9.16 121 27.00
Benefits (1 = Not True; 5 = Extremely True)
I take more pride in my work. 3.92 119 1.00
My work seems for satisfying. 3.57 119 .89
I am more likely to stay with this 3.73 120 .97
My company is more effective 3.43 120 .91
I 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 1.21
to be with my friends 2.54 118 1.32
to gain recognition 3.08 118 1.25
to solve problems 4.47 120 .70
to help the company 4.22 118 .93
for job advancement 3.28 117 1.34
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
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
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.
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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