J. of the Acad. Mark. Sci.
(2010) 38:90–104
DOI 10.1007/s11747-008-0129-6
ORIGINAL EMPIRICAL RESEARCH
The effects of supplier capabilities on industrial customers’
loyalty: the role of dependence
Lisa K. Scheer & C. Fred Miao & Jason Garrett
Received: 2 December 2008 / Accepted: 18 December 2008 / Published online: 20 January 2009
# Academy of Marketing Science 2009
Abstract This research examines whether suppliers’ capa-
bilities impact OEM customers’ dependence on the supplier
and thereby generate customer loyalty. Using a sample of
purchasing managers focusing on a single key component
supplier, we examine three supplier capabilities, two
dependence dimensions, and three aspects of customer
loyalty. Core offering capability increases the customer
firm’s benefit-based dependence. Operations capability has
a more comprehensive effect, enhancing both benefit-based
and cost-based dependence. Benefit-based dependence
leads to relational loyalty and, through its effect on
relational loyalty, to insensitivity to competitive offerings
and future purchase expansion. Cost-based dependence
motivates insensitivity to competitive offerings, but does
not affect relational loyalty or purchase expansion. The
supplier’s communication capability is associated with
relational loyalty, but this effect does not flow through the
customer firm’s dependence. The divergent pattern of
antecedents and effects of benefit-based dependence and
L. K. Scheer (*)
Robert J. Trulaske, Sr. College of Business,
University of Missouri,
428 Cornell Hall,
Columbia, MO 65211, USA
e-mail: scheer@missouri.edu
C. F. Miao
School of Business, Clarkson University,
362 New Snell Hall,
Potsdam, NY 13699-5765, USA
e-mail: fmiao@clarkson.edu
J. Garrett
Foster College of Business Administration, Bradley University,
409 Baker Hall,
Peoria, IL 61625, USA
e-mail: kjgarrett@bradley.edu
cost-based dependence may explain the inconsistent and
insignificant research findings in previous research on
dependence. Our results suggest that adopting a bi-
dimensional model of dependence more fully captures the
theoretical domain of dependence, thereby permitting
researchers to better examine its role in supply chain,
channel, and marketing relationships.
Keywords Business to business relationships . Loyalty .
Dependence . Supplier–buyer relationships .
Marketing capabilities
The May 2007 issue of Inside Supply Management noted
that the reviving manufacturing sector brings great oppor-
tunities for industrial suppliers, but also has motivated
OEM customers to consolidate their supply bases. As
manufacturers reduce their suppliers, “highly reliable
service, repeated process or product innovations, manufac-
turing flexibility, responsiveness to market trends, and short
product development cycles” become increasingly critical
(Amit and Schoemaker 1993, p. 35). Researchers in
marketing (e.g., Day 1994; Dutta et al. 1999; Jap 1999),
supply chain (e.g., Autry et al. 2005; Kempainen and
Vepsalainen 2003), and management (e.g., Barney 1991;
Grant 1996; Ray et al. 2004) contend that organizational
resources and capabilities constitute an important source of
sustainable competitive advantage.
We pursue Srivastava et al.’s (1998) suggestion that
capabilities’ impact on performance outcomes may be
mediated by market-based assets, examining customer
loyalty and dependence. We do not assert that capabilities’
performance effects are fully mediated by customer loyalty,
but loyalty is both an indicator of effective deployment and
J. of the Acad. Mark. Sci. (2010) 38:90–104 91

an antecedent of favorable customer actions that generate
supplier performance outcomes. Identifying and maintain-
ing customer loyalty can be a key differentiator through
which supply chain members establish sustainable compet-
itive advantage (Davis and Mentzer 2006). Surprisingly,
customer loyalty has received little attention in supply
chain research (Keller et al. 2002).
We propose that supplier capabilities motivate customer
loyalty by generating customer dependence, a firm’s need
to maintain its relationship with an exchange partner in
order to achieve its desired goals (Frazier 1983). Depen-
dence is a factor even in successful supplier–customer
relationships (Davis and Mentzer 2006) and is critical to
establishing stronger supply chain linkages (Cheng and
Grimm 2006). Customer dependence provides a window of
opportunity to improve service, broaden and deepen
boundary spanners’ interpersonal ties, and capitalize on
idiosyncratic knowledge to better meet customer needs (Jap
1999).
Consistent with Ulaga and Eggert’s (2006) suggestion
that the relationship between supplier capabilities and
customer dependence is worthy of investigation, we
propose that customer dependence plays a critical mediat-
ing role in enabling the supplier to convert its capabilities
into competitive advantage. We theorize that supplier
capabilities motivate loyalty through diverse mediating
mechanisms, some of which directly enhance the supplier’s
value to the customer and others which erect exit barriers
that impose additional costs on the customer to supplant the
supplier. We simultaneously examine benefit-based depen-
dence and cost-based dependence—two distinct dimensions
of dependence that have been theoretically conceptualized
(Scheer and Smith 1996) but not empirically tested. This
research extends Ulaga and Eggert by elucidating how and
to what extent supplier capabilities impact customer
dependence and the important strategic outcome of cus-
tomer loyalty.
The remainder of this article is organized as follows: we
review the pertinent literature and present hypotheses,
describe our research method, discuss the implications of
our findings, summarize the limitations of this research, and
offer suggestions for future research.
Theory and hypotheses
Supplier capabilities
Despite calls for a more integrative operationalization of
firm capabilities (Amit and Schoemaker 1993; Grant 1996),
most researchers have examined one type of organizational
capability at a time. In contrast, Ulaga and Eggert (2006)
synthesized value-creation capabilities into three dimen-
sions. We similarly examine three types of supplier
capabilities that are consistent with Ulaga and Eggert’s
framework. We ask: How do these value-creation capabil-
ities generate customer loyalty? Although there are a
plethora of firm-level mechanisms through which supplier
capabilities can motivate loyalty, we theorize that ultimately
those mechanisms generate customer dependence on the
supplier. Figure 1 depicts our Capability→Dependence→
Loyalty model. First, we discuss the nature of customer
dependence and then offer our rationale for its mediating
role.

Figure 1 The Capability→

Dependence→Loyalty model. Supplier Customer Firm Customer Firm
Capabilities Dependence Loyalty

Core Offering
Capability Behavioral Loyalty

H1 Relational Insensitivity to
Benefit-Based H4 H6a
Communication Loyalty Competitive
H3 Dependence
Capability Offerings

H5a H6b
H2a Cost-Based
Operations H5b Future Purchase
Capability Dependence Expansion
H2b H5c

Control Variables
• Purchase Price
• Inventory Cost
• Ordering Cost
• Relationship Duration
• Time Pressure

Note: Dotted arrows represent negative effects.

92
Customer dependence
Dependence has been defined very consistently in business-
to-business marketing research, but operationalizations vary
widely. Some researchers examine dependence on an
exchange partner using a global dependence measure such
as the irreplaceability of the partner and/or the firm’s
overall dependence. This approach focuses on the extent of
dependence, but does not address why the firm is
dependent; it reveals nothing about the configuration or
nature of that dependence. Examples of global dependence
assessments include Andaleeb (1996); Antia and Frazier
(2001); Celly and Frazier (1996); Gundlach et al. (1995);
Johnson (1999); Joshi and Campbell (2003); Lusch and
Brown (1996); Palmatier et al. (2007); and Rinehart and
Page (1992).
Whether by design, coincidence, or default, other
researchers assess underlying factors that make the ex-
change partner less replaceable. Marketing and supply
chain research has predominantly used dependence mea-
sures that focus on positive motivations for maintaining
relationships, measuring benefits received from the current
relationship, sometimes qualified further as the replace-
ability of those relational benefits. Examples of operation-
alizations that emphasize positive motives include sales/
profit concentration (Heide and John 1988; Kale 1989; Kim
and Frazier 1997; Lewis and Lambert 1991; Nicholson et
al. 2001; Rokkan et al. 2003), partner importance (Ferguson
et al. 2005; Hallen et al. 1987), role performance (Kim
2000; Skinner and Guiltinan 1985), resource dependence
(Johnson et al. 2001a), availability of alternatives (Cannon
and Homburg 2001), outcomes given alternatives (Anderson
and Narus 1984), alternative attractiveness (Johnson et al.
2001b; Patterson and Smith 2003; Ping 1993) and value
received from the present relationship that cannot be
obtained from alternatives (Hibbard et al. 2001; Morgan
and Hunt 1994; Provan and Skinner 1989).
However, the need to maintain an exchange relationship
also can arise from less positive motivations. After
Williamson (1975, 1985) highlighted negative motivations
for relationship maintenance, marketing researchers began
to use measures that focus on negative motivations such as
switching costs (Anderson and Narus 1990; Bansal et al.
2004; Burnham et al. 2003; Ferguson et al. 2005; Heide and
John 1988; Heide and Weiss 1995; Lam et al. 2004;
Morgan and Hunt 1994; Patterson and Smith 2003; Ping
1993; Sengupta et al. 1997). Although one could argue that
such costs are an antecedent to dependence, the same
argument could be made for the positively-based motivations
that have dominated dependence research. Clearly disengage-
ment and replacement costs restrict viable alternatives.
Many have adopted Emerson’s (1962) conceptualization
of dependence as arising from motivational investment in
J. of the Acad. Mark. Sci. (2010) 38:90–104
goals mediated by an exchange partner and the inability to
achieve those goals through alternatives. Far less widely
acknowledged, however, is Emerson’s position that the
“costs associated with such alternatives must be included in
any assessment of dependency” (1962, p. 32). Consistent
with this view, we assert that any conceptualization or
operationalization of overall customer dependence that fails
to adequately capture both positive and negative motiva-
tions is inherently incomplete.1 Some researchers have
attempted to capture both motivations in a single, compre-
hensive dependence scale by including items assessing both
benefits and costs (e.g., Kumar et al. 1995, 1998; Payan and
McFarland 2005). These comprehensive dependence mea-
sures—and global dependence scales—can be effective if
both types of dependence operate similarly; however, if
positively-motivated dependence and negatively-motivated
dependence have different effects or are impacted differ-
ently by antecedents, these measures also fall short.
Thus, we contend that extant measures of dependence—
whether global, focusing only on positive motivations or
only on negative motivations, or even comprehensive
measures that encompass both positive and negative
motivations in a single scale—are incapable of fully
accounting for differential effects of, or diverse effects on,
positively-motivated and negatively-motivated dependence.
Indeed, it is possible that the inconsistent, relatively low
magnitude, and sometimes statistically insignificant effects
reported in the marketing literature between dependence
and other important constructs may be due to the varying,
incomplete, or contradictory nature of the dependence
measures used!
We therefore operationalize a bi-dimensional depen-
dence model that incorporates two independent dimensions
reflecting positive and negative motivations (Scheer and
Smith 1996). Benefit-based dependence—the need to
maintain the relationship because of the irreplaceable net
benefits that result from the on-going relationship—focuses
on manifest, presently-realized positive relational benefits.
In contrast, cost-based dependence—the need to maintain
the relationship because of the new costs that will be
incurred if the relationship ends—focuses on the latent,
currently dormant negative factors that would be realized in
the future upon relationship termination. This bi-dimen-
sional dependence framework is thus an elaboration and
extension of Emerson’s model; each conceptually distinct
dimension is rooted both in the firm’s motivational
investment in the current relationship and its available
alternatives. Benefit-based dependence is grounded in the
1
We hasten to add, however, that overall dependence is not always
the focal construct. If theory suggests that a specific type of
dependence is the focal antecedent or consequence, studying that
more specific type of dependence would be appropriate.
J. of the Acad. Mark. Sci. (2010) 38:90–104
motivational investment arising from the unique benefits
presently derived, which is a function of the value received
from the current relationship and the extent to which that
value is replaceable. Cost-based dependence is grounded in
the latent costs that would be realized upon relationship
termination, including the motivational investment arising
from the disengagement costs of ending the current
relationship plus all search, assessment, acquisition, adap-
tation, and installation costs that would be incurred to
secure a viable alternative.2 Benefit-based dependence thus
represents the opportunity costs of the net benefits foregone
if the relationship terminates, while cost-based dependence
is rooted in the other latent costs that erode one’s ability to
replace the current partner.
Supplier capabilities and effects on customer dependence
Olavarrieta and Ellinger (1997) suggest that developing
core competencies impacts supply chain performance by
creating economic dependencies. We propose that supplier
capabilities generate customer loyalty either through pro-
viding services, assistances, and valued actions that create
benefit-based dependence, or by making it more difficult
and costly to break off interaction, thereby increasing cost-
based dependence. We consider whether three focal
supplier capabilities—core offering capability, operations
capability, and communication capability—will generate
benefit-based dependence and/or cost-based dependence.
Core offering capability is the supplier’s reliable product
quality and consistent delivery performance (Ulaga and
Eggert 2006). In industrial relationships, the quality of a
supplier’s product creates value for the buying firm by
enhancing its net exchange benefits. Procuring the right
materials and/or components is often the easiest, quickest
way to enhance competitiveness of one’s own final product
(Burt 1989). High quality materials also generate significant
savings for the customer as they require minimal rework,
downtime, or scrap (Cannon and Homburg 2001). Reliable
delivery creates value by reducing the customer’s product
acquisition costs (Cannon and Homburg 2001) and im-
proving operational efficiency (Doney and Cannon 1997).
However, core offering capability is unlikely to generate
high disengagement or replacement costs. In business-to-
business markets, extant product quality typically can be
readily quantified (Das and Buddress 2007). Especially in
highly competitive industrial markets, suppliers offer
comparable quality and delivery service in mature product
2
Ongoing, manifest costs such as ordering costs or inventory costs do
not impact cost-based dependence. They could, however, impact
benefit-based dependence by reducing the net value of the benefits
derived from the current relationship.
93
lines; customers can easily find similar quality products
with minimal search and replacement costs (Adewole
2005). Consequently, we anticipate that a supplier’s core
offering capability will generate customer benefit-based
dependence on the supplier, but will not increase cost-based
dependence:
H1: The supplier’s core offering capability increases the
customer firm’s benefit-based dependence.
Core offering capability allows the supplier to meet
current customer needs, but operations capability, the
supplier’s expertise in applying know-how to the improve-
ment of existing products and to the design and develop-
ment of new products, is dynamic (Teece et al. 1997; Ulaga
and Eggert 2006). Because the customer’s ability to
respond to changes in its downstream market heavily relies
on its supplier’s responsiveness (Wathne and Heide 2004),
and as product life cycles are becoming shorter (Slater and
Narver 2000), the supplier’s operations capability is in-
creasingly important. Superior operations capability allows
the supplier to recognize and implement customers’ desired
changes (Flint et al. 2002), creating unique value for the
customer, and increasing its benefit-based dependence.
Although a customer can assess product quality ex ante,
its assessment of a supplier’s capability to meet changing
customer needs often can only be determined within an
ongoing relationship. Burt (1989) noted that it usually takes
up to two years before a supplier’s product development
capability can be accurately assessed. We anticipate that
superior supplier operations capability will increase the
customer’s economic risk of terminating the relationship
and the time, effort, and costs needed to identify and
evaluate alternative sources (Burnham et al. 2003), thereby
increasing customer cost-based dependence. Accordingly,
we hypothesize:
H2: The supplier’s operations capability increases the
customer firm’s
(a) benefit-based dependence and
(b) cost-based dependence.
Value creation also hinges on the supplier’s communi-
cation capability, its ability to effectively interact and
exchange information with the buying firm to solve mutual
problems (Ulaga and Eggert 2006). The formal and
informal interfirm sharing of meaningful, timely and
sensitive information is vital to developing effective
interorganizational supply relationships (Carr and Pearson
1999). Communication can mitigate conflict (Kim and
Frazier 1997) and operations costs (Cannon and Homburg
2001), enhance interfirm cooperation (Anderson and Narus
1990), improve service quality (Mentzer et al. 2001) and
94
generate positive customer outcomes (Jap 1999), all of
which increase customer benefit-based dependence.
We do not, however, anticipate that the supplier’s
communication capability will affect the customer firm’s
termination, search, and replacement costs. Although
communication capability may strengthen cross-firm social
relationships (Anderson and Narus 1990; Morgan and Hunt
1994) and thereby impact boundary spanners’ interpersonal
dependence and loyalty, its ability to erect firm-level
switching costs pales in comparison to its impact on
presently-realized relational benefits (Wathne et al. 2001).
We posit:
H3: The supplier’s communication capability increases the
customer firm’s benefit-based dependence.
Effects of customer firm dependence on loyalty
to the supplier
Dependence frequently has been conceptualized as an
antecedent of commitment or loyalty (Bansal et al. 2004;
Burnham et al. 2003; Cannon and Homburg 2001; Ganesan
1994; Gundlach et al. 1995; Johnson et al. 2001a, b; Kim
and Frazier 1997; Kumar et al. 1995; Morgan and Hunt
1994). We take a fresh look at these relationships, however,
and consider three indicators of customer loyalty and how
they are impacted by the positive and negative dimensions
of dependence. Relational loyalty is the customer firm’s
expressed intent to remain loyal because of its positive
relationship with the supplier. This type of conative loyalty
(Oliver 1999) arises from repeated episodes of favorable
interaction between supplier and customer. We posit that as
the unique benefits received by the customer and its
benefit-based dependence increase, the more satisfying is
the firm’s cumulative relationship experience and the
greater the customer’s relational loyalty toward the supplier.
In industrial markets, a customer that is dependent on its
supplier for superior benefits tends to perceive compatible
goals and values (Gilliland and Bello 2002) and is likely to
experience “fulfillment of objectives” (Oliver 1999, p. 35)
and relational satisfaction (Morgan and Hunt 1994), all of
which enhance relational loyalty. We anticipate that the
customer’s cost-based dependence will reduce its relational
loyalty toward the supplier. The exit barriers erected by
switching costs tend to make relationships more calculative
(Bansal et al. 2004), with concomitant erosion in the
positive working relationship between the firms.3
3
Although not the focus of this study, we anticipate that cost-based
dependence will tend to promote calculative commitment, especially
when benefit-based dependence and overall affective commitment are
low.
J. of the Acad. Mark. Sci. (2010) 38:90–104
Relational loyalty is derived from a positive evaluation
of the relationship, but unless this expressed customer
loyalty is manifest in tangible behaviors, it has no effect on
supplier performance outcomes. We examine two behav-
ioral loyalty elements. Future purchase expansion (Cannon
and Homburg 2001) reflects the customer’s intent to
purchase more in the future. Insensitivity to competitive
offerings reflects a high degree of customer allegiance
“despite situational influences and marketing efforts having
the potential to cause switching behavior” (Oliver 1999, p.
36). A customer who actively seeks and who is highly
aware of competitive offerings is more likely to pursue
concessions from a supplier, even if that customer has high
relational loyalty and future purchase intentions. Oliver
(1999, p. 36) argues that more general conative loyalty
intentions become manifest through the “readiness to act”
in specific ways. We therefore anticipate that relational
loyalty will positively impact the behavioral loyalty
variables of insensitivity to competitive offerings and future
purchase expansion.
Research suggests that benefit-based dependence alone
is unlikely to generate insensitivity to competitive offerings
or future purchase expansion (Burnham et al. 2003; Morgan
and Hunt 1994). Receiving unique benefits provides
motivation to maintain the relationship, but the customer
still has motivation to scan competitive offerings to be
better positioned to negotiate future purchases. In contrast,
the customer’s cost-based dependence is expected to
increase insensitivity to competitive offerings, because the
customer seeks to avoid disutilities such as latent costs
(Burnham et al. 2003). In the absence of cost-based
dependence, the firm will be more attentive to entreaties
from viable competing suppliers. Moreover, as cost-based
dependence engenders continuity expectations (e.g., Heide
and John 1990; Morgan and Hunt 1994), firms with high
cost-based dependence will be particularly motivated to try
to increase their partners’ dependence as well. By purchas-
ing more, the customer can increase its importance to the
supplier, thereby increasing the supplier’s dependence on
the customer, increasing the total supplier–customer depen-
dence, and possibly reducing the customer’s relative
dependence on the supplier (Kumar et al. 1995). Thus, we
hypothesize:
H4: The customer firm’s benefit-based dependence on a
focal supplier will increase its relational loyalty to that
supplier.
H5: The customer firm’s cost-based dependence on a focal
supplier will
(a) decrease its relational loyalty to that supplier,
(b) increase its insensitivity to competitive offerings
from other suppliers, and
J. of the Acad. Mark. Sci. (2010) 38:90–104
(c) increase its future purchase expansion with that
supplier.
H6: The customer firm’s relational loyalty to the supplier
will increase its:
(a) insensitivity to competitive offerings from other
suppliers and
(b) future purchase expansion with that supplier.
Supplier capabilities’ effects on the customer firm loyalty
How and why do supplier capabilities generate loyalty in a
customer? When focusing on firm-level mediating process-
es, we assert that customer loyalty is motivated when
supplier capabilities generate customer benefit-based or
cost-based dependence. The supplier employs its capabili-
ties to generate great products and value-added services for
its customers. Such benefits alone, however, cannot
generate loyalty unless they are of such uniqueness that
they cannot be readily replaced through alternative sources
or they create greater disengagement or replacement costs.
Even if the supplier can leverage its capabilities to deliver a
high level of benefits, loyalty is unlikely to be generated if
the customer can easily, quickly, and inexpensively replace
those benefits.4 Thus, we hypothesize that the effects of the
supplier’s capabilities on customer loyalty will be mediated
through the customer’s benefit-based dependence and cost-
based dependence:
H7: The effects of the supplier’s (a) core offering, (b)
operations, and (c) communication capability on a custom-
er’s loyalty will be mediated through their effects on the
customer’s dependence.
Research method
Sample
Our sample consists of purchasing managers for industrial
manufacturers in SIC codes 35 (industrial machinery and
equipment), 36 (electronic equipment), 37 (transportation
equipment), and 38 (instruments and related products).
After interviews with seven purchasing managers and a
review of relevant literature, we developed an initial draft
of the survey instrument which was pre-tested with 46
purchasing managers affiliated with the Institute for Supply
4
Supplier capabilities could possibly also generate services and
benefits that directly stimulate personal loyalty from boundary
spanners within the customer firm, but our focus here is on interfirm
customer loyalty.
95
Management (ISM). On the basis of the pre-test, minor
revisions were made.
We randomly selected a sample of 1,000 purchasing
managers from a list of 5,000 supplied by ISM. We used a
professional marketing research company to telephone each
purchasing manager, verify active involvement in and
knowledge of purchasing/supplier relationships, and solicit
participation in our study. We sent each of the 502 qualified
purchasing managers who agreed to participate in our study
a package containing a cover letter, survey instrument, and
postage-paid return envelope; 3 weeks later a reminder
package containing the same materials was sent to non-
respondents. This two-wave procedure generated a total of
181 completed surveys. Seven informants who demonstrated
insufficient knowledge (i.e., a score of less than 4 on a
qualification question) were eliminated from further analy-
sis. Average informant response to the qualification question
was acceptable (5.7 out of a maximum of 7). The final
sample consists of 174 purchasing managers, an effective
response rate of 34.7% of the pre-qualified sample (17.4% of
the original sample). No significant differences on demo-
graphic variables and construct means were found between
informants who responded in the first wave (n=126) and the
second wave (n=48) (Armstrong and Overton 1977).
Table 1 presents characteristics of our final sample.
Measurement
The survey asked purchasing managers to identify a major
supplier of a critical component used in the firm’s main
product line; all questions refer to this focal supplier.
Following the recommendation of Podsakoff et al. (2003),
we designed the questionnaire so that predictor and
criterion variables appeared in different sections. We strove
to preserve temporal order by formulating predictor
variables that reflect the current situation and criterion
variables (i.e., customer loyalty) that reflect beliefs and
intents regarding the future. Different anchors (i.e., strongly
agree/disagree, very weak/strong) were used to vary the
response format where appropriate. See the “Appendix” for
details regarding our measures.
When possible, we adapted measurement items from the
extant literature, but we developed new measures when
necessary; all are reflective scales. Core offering capability
(α=0.82) was measured with five items that address the
supplier’s core product quality and delivery performance.5
Operations capability (α=0.82) was measured with four
5
While Ulaga and Eggert (2006) measured the key supplier’s
capability relative to the secondary supplier, we measured capability
in an absolute sense.
96 J. of the Acad. Mark. Sci. (2010) 38:90–104

Table 1 Characteristics of informants’ firms measured with three newly developed items that capture the
Characteristic Number in Percentage customer’s sensitivity and responsiveness to competitive
sample offerings (reverse-scored). Future purchase expansion was
measured with three items adapted from Cannon and
Industry Homburg (2001) that tap the intention to award more
Aerospace 15 8.6
business to the focal supplier if the customer increases its
Automotive 26 14.9
production.
Computer and communication 22 12.6
Electronics 30 17.2 We also included single-item measures of several
Industrial machinery and equipment 32 18.4 elements that have been found to impact customer loyalty—
Measurement and control instruments 19 10.9 the supplier’s price competitiveness, ability to reduce custom-
Medical equipment 10 5.7 er inventory costs, ability to reduce customer ordering costs,
Other 15 8.6 customer-supplier relationship duration, and the time pressure
Not reported 5 2.9 the customer faced when making purchasing decisions at the
Total 174 100.0
outset of the relationship. We examine the effects of these
Number of employees
<500 81 46.6
control variables on both customer loyalty and the dependence
500 to 999 17 9.8 mediators.
1,000 to 4,999 26 14.9
5,000 to 10,000 15 8.6
>10,000 28 16.1 Results
Not reported 7 4.0
Total 174 100.0 Measurement model
Relationship duration with supplier
<5 years 28 16.1
5 to 10 years 67 38.5 We assessed the measurement properties of the eight multi-
11 to 15 years 22 12.6 item latent constructs in Fig. 1 using confirmatory factor
16 to 20 years 33 19.0 analysis in EQS 6.1. Each item was restricted to its a priori
21 to 25 years 8 4.6 factor and each factor was allowed to correlate with all
26 to 30 years 7 4.0 other factors. After dropping one relational loyalty item and
>30 years 5 2.9 one future purchase expansion item based on modification
Not reported 4 2.3
indices, the measurement model demonstrated an accept-
Total 174 100.0
able fit: χ2(322) =443.740, p<.01; Normed Fit Index [NFI]=
.899, Comparative Fit Index [CFI]=.970, Root Mean
Square Error of Approximation [RMSEA] = .049. We
items capturing the supplier’s capabilities in product im- evaluated potential common method bias in our cross-
provement, new product design, and new product introduc- sectional data in two ways. First, we conducted Harmon’s
tion. Communication capability (α=0.91) was measured post hoc single factor test. Confirmatory factor analysis
with six items that tap the supplier’s ability to improve indicated that the single common-method-factor measure-
interaction quality and problem solving with the customer ment model (NFI=.615, CFI=.666, RMSEA=.156) com-
through effective communication. pared unfavorably with our eight-factor measurement
Benefit-based dependence (α=0.77) was measured using model (Δχ2(27) =1254.098, p<.001). Second, following
three items that assess the unique benefits the customer Malhotra et al. (2006) and Jayachandran et al. (2005), we
derives from the supplier relationship. Cost-based depen- used the marker variable technique. We selected relation-
dence (α=0.79) was measured with three items tapping the ship duration as the marker variable, as it has the smallest
latent costs of ending the relationship and implementing a positive correlations (Lindell and Whitney 2001) with
replacement supplier. Although scholars previously have relational loyalty (r=.098, n.s.), insensitivity to competitive
examined similar variables, albeit seldom in the same study, offerings (r=.028, n.s.), and future purchase expansion
extant measures either capture only a portion of the (r=.011, n.s.). The marker variable-adjusted correlations
dimension’s theoretical domain or extend beyond the dimen- were then used as input for the estimation of the proposed
sion’s domain. Therefore, we developed measures that more structural relationships. All significant paths in the
precisely assess the domain of each dependence dimension. proposed model remain statistically significant with the
Relational loyalty was measured with three items same signs and similar magnitudes.6 Based on the totality
adapted from Kumar et al. (1995) that address the relational
basis of the customer’s continuity intentions and expressed 6
Upon request, the marker variable-adjusted structural model results
loyalty. Insensitivity to competitive offerings (α=0.77) was are available from the second author.
J. of the Acad. Mark. Sci. (2010) 38:90–104
Table 2 Construct means, standard deviations, and correlations (N=174)
M SD 1 2
Core offering capability 5.554 0.889 .824
Communication capability 5.014 1.065 .465**
Operations capability 4.424 1.105 .296**
Benefit-based dependence 3.835 1.380 .230**
Cost-based dependence 4.823 1.353 .067
Relational loyalty 5.156 1.217 .271**
Insensitivity to competitive offerings 5.132 1.163 .244**
Future purchase expansion 5.400 1.156 .305**
Construct reliabilities are on the diagonal; measurement model fit: χ2 (322) =443.74, p<.01; NFI=.899; CFI=.970; RMSEA=.049
*p<.05 (two-tailed), **p<.01 (two-tailed)
of our questionnaire design, item specificity, post hoc
examinations, and nomological validity, common method
bias does not appear to be a serious concern.
All a priori factor loadings of the latent constructs were
large, positive, and significant (p<.01), demonstrating
convergent validity of these reflective scales (Bagozzi et
al. 1991). Discriminant validity was established in two
ways. Each pair of constructs was assessed using nested
CFA models in which a one-factor model was compared to
a two-factor model using chi-square difference tests; in
each case the two-factor model had significantly better fit
(Bagozzi et al. 1991). In addition, the average variance
extracted (AVE) by each construct was greater than its
shared variance with all other constructs (Fornell and
Larcker 1981). Table 2 summarizes the descriptive statistics
of our data.
Hypotheses testing
Due to the incorporation of single-item control variables,
we estimated a structural path model using EQS 6.1. As the
two dependence constructs are potentially affected similarly
by some antecedents, we allowed their error terms to
correlate (cf. Jap 1999). Because we posited that the two
dependence dimensions mediate the effects of the three
supplier capabilities on customer loyalty, we first estimated
a full mediation model. The full mediation model had
marginally acceptable fit (χ2(14) =32.277, p<.01; NFI=
.952, CFI=.970, RMSEA=.092). Based on the modifica-
tion indices, one additional path from communication
capability to relational loyalty was required. This revised
partial mediation model demonstrated acceptable fit (χ2(13) =
28.427, p<.01; NFI=.958, CFI=.974, RMSEA=.081) and
was used to examine the hypotheses. As directional
hypotheses were offered, one-tailed significance tests were
conducted. The partial mediation model is depicted in
Fig. 2. Table 3 summarizes our results.
We first examine the effects of the supplier capabilities.
Core offering capability has a positive effect on the
97
3 4 5 6 7 8
.905
.655** .816
.243** .369** .768
.244** .261** .452** .792
.326** .198** .377** .259** .652
.153* .053 .207** .382** .477** .767
.289** .210** .182* .249** .398** .419** .665
customer’s benefit-based dependence (β=.205, p<.01),
supporting H1. Consistent with H2a and H2b, the supplier’s
operations capability positively affects both benefit-based
(β=.437, p<.01) and cost-based (β=.226, p<.05) depen-
dence. Communication capability impacts only relational
loyalty (β=.192, p<.05), an effect not mediated by either
dimension of dependence. H3 must be rejected. Consistent
with our expectations, neither core offering nor communi-
cation capability directly affects cost-based dependence
(i.e., no significant path based on modification indices).
We next examine the effects of customer dependence. As
hypothesized in H4, benefit-based dependence has a direct
positive impact on the customer’s relational loyalty (β=
.323, p<.01). Cost-based dependence has no effect on
relational loyalty (β=.097, n.s.) or future purchase expan-
sion (β = .117, n.s.), but it has a positive effect on
insensitivity to competitive offerings (β=.315, p<.01).
H5a and H5c are rejected, but H5b is supported. Relational
loyalty has a significant positive effect on both insensitivity
to competitive offerings (β = .453, p< .01) and future
purchase expansion (β=.361, p<.01), supporting H6a and
H6b. Through its positive effect on relational loyalty,
benefit-based dependence has an indirect positive effect
on insensitivity to competitive offerings and future pur-
chase expansion.
To examine the mediation hypotheses, we compared the
revised partial mediation model with a rival nested model
allowing direct paths from each capability to all customer
loyalty variables. The chi-square difference between the
revised partial mediation model and this more complex, less
parsimonious model was not statistically significant
(Δχ2(8) =12.715, n.s.), indicating that the additional direct
paths from supplier capabilities do not improve model fit.
This analysis suggests that benefit-based and cost-based
dependence mediate the impact of core offering capability
and operations capability on these customer loyalty
variables (cf., Fang et al. 2004; Nicholson et al. 2001; and
Palmatier et al. 2007), supporting H7a and H7b. H7c is
rejected.
98 J. of the Acad. Mark. Sci. (2010) 38:90–104

Figure 2 Partial mediation

model. Note: All significant at Supplier .192 Customer
p<.05 or lower. Communication Relational
Capability Loyalty
Relationship
Duration
.323 .361
.236
-.151 .453
Time Customer
Supplier Core .205 Customer
Pressure Insensitivity to
Offering Benefit-Based .142 -.157
Competitive
Capability Dependence
Offerings
.437
Customer
Price .159 Future
Customer .315
Supplier .226 Competitiveness Purchase
Operations Cost-Based Expansion
Capability Dependence

Note: All significant at p < .05 or lower. Control variables

in italics & their effects indicated with dashed lines.

The control variables relationship duration, time pres-
sure, and price competitiveness also significantly impact
customer dependence and loyalty. Relationship duration
was found to have a positive association with benefit-based
dependence (β=.236, p<.01), suggesting that buyer–seller
relationships that survive competitive pressures over time
generate unique customer benefits. Time pressure of
purchasing decisions at the outset of the relationship
increased the salience of benefit-based dependence to
customers (β=.142, p<.05), decreased relational loyalty
(β=−.151, p<.05), and decreased insensitivity to compet-
itive offerings (β=−.157, p<.01). A supplier who estab-
lishes a relationship with a customer that faces high time
pressure should anticipate that the customer will have
doubts about its quick decision and will continue to
scrutinize competitors’ offerings to verify that the existing
supply relationship is worthwhile. Lastly, the supplier’s
price competitiveness positively impacted the customer’s
future purchase expansion (β=.159, p<.05), indicating the
advantages of continuously improving value for the
customer via price reduction (e.g., via economy of scale,
process improvements, etc.).
Discussion
With the trend of supplier consolidation in modern supply
chain management, maintaining customer loyalty has

Table 3 Partial mediation model results (N=174)

Hypotheses Path β t Value

Hypothesis 1 Core offering Capability → Benefit-based dependence .205 2.379 **

Hypothesis 2a Operations Capability → Benefit-based dependence .437 3.839 **
Hypothesis 2b Operations Capability → Cost-based dependence .226 2.177 *
Hypothesis 3 Communication Capability → Benefit-based dependence −.173 −1.580
Hypothesis 4 Benefit-based dependence → Relational loyalty .323 3.604 **
Hypothesis 5a Cost-based dependence → Relational loyalty .097 1.112
Hypothesis 5b Cost-based dependence → Insensitivity to competitive offerings .315 4.165 **
Hypothesis 5c Cost-based dependence → Future purchase expansion .117 1.374
Hypothesis 6a Relational loyalty → Insensitivity to competitive offerings .453 5.926 **
Hypothesis 6b Relational loyalty → Future purchase expansion .361 4.174 **
Added path Communication capability → Relational loyalty .192 2.109 *
Control variables (significant paths reported in table)
Relationship duration → Benefit-based dependence .236 2.897 **
Time pressure → Benefit-based dependence .142 1.786 *
Time pressure → Relational loyalty −.151 −1.895 *
Time pressure → Insensitivity to competitive offerings −.157 −2.166 *
Price competitiveness → Future purchase expansion .159 1.719 *

Structural model fit indices: χ2 (13) =28.427, p<.01; NFI=.958; CFI=.974; RMSEA=.081
*p<.05 (one-sided), **p<.01 (one-sided)
J. of the Acad. Mark. Sci. (2010) 38:90–104
become increasingly important for long-term survival of
industrial suppliers (Milligan 2000). This study draws on
the resource-based view and dependence research to
examine the development of customer loyalty in the supply
chain. Elucidating the distinct mediating roles of benefit-
based and cost-based dependence and the Capability→De-
pendence→Loyalty framework provides crucial insights
into the mechanisms through which supplier capabilities
can be converted into competitive barriers and offers a
partial answer to Davis and Mentzer’s (2006) call for a
better understanding of customer loyalty.
Ulaga and Eggert (2006) found that their three supplier
capability dimensions enhance the customer’s perceived
relational benefits. Our study extends Ulaga and Eggert’s
findings by demonstrating that different types of capabili-
ties can impact customer loyalty in very different ways.
Communication capability’s effect on the customer rela-
tional loyalty is not mediated by customer dependence. As
relational loyalty involves only a general expression of
loyalty, it possibly is more vulnerable to key informant bias
than the other action-oriented loyalty constructs. Could the
informant’s own personal loyalty to the supplier have
shaded his or her report of customer firm loyalty? Perhaps,
but as we carefully designed our relational loyalty measure
to reduce this possibility by including the focal referent
“our firm” in each item and by stressing evaluative
elements rather than affective reactions, we think it is
unlikely in this case. As interfirm communication inhe-
rently is comprised predominantly of boundary spanners’
interactions, we speculate that perhaps communication
capability has its primary impact through interpersonal
mediating mechanisms not specifically examined in our
interfirm study. Stronger supplier communication capabil-
ities generate greater interpersonal loyalty across the firms;
the interpersonal loyalty of the customer firm’s buyers and
other boundary spanners in aggregate leads to a positive
overall evaluation of the customer firm’s relationship with
the supplier (e.g., Kumar et al. 2007).
We find that the supplier’s core offering and operations
capabilities generate customer loyalty, but do so through the
mediating mechanisms of the customer’s benefit-based and
cost-based dependence. Our findings reveal that organiza-
tional capabilities can impact strategic outcomes indirectly
through intermediary processes (e.g. Srivastava et al. 1998)
and that customer dependence is an important relational
mediator in the supply chain context.
Core offering capability reflects the supplier’s ability to
maintain satisfactory quality and delivery performance to
meet the current product/service needs of the customer.
Although a supplier that excels in this capability generates
benefit-based dependence among its customers, relying on
current product quality and delivery performance does not
99
erect the switching barriers associated with cost-based
dependence. This finding corroborates Flint et al.’s (2002,
p. 102) argument that “suppliers cannot depend on what
they currently know about customer value to hold into the
future.” In highly competitive environments, competitors
can quickly match product offerings, so there usually will
be multiple suppliers capable of providing comparable
product quality. Because the product quality offered by
alternative suppliers can be examined ex ante in the bidding
process, the customer’s cost-based dependence remains
low.
Operations capability, in contrast, reflects a supplier’s
ability to accommodate a customer’s desired value change
(Flint et al. 2002) through its superior product design and
implementation skills. Operations capability is dynamic in
nature and thus can seldom be confidently or fully assessed
ex ante (Teece et al. 1997). Because this requires the
customer to build closer relationships with the supplier
through collaboration efforts and idiosyncratic investments
(Jap 1999), supplier operations capability both (a) generates
unique value for the customer and the associated benefit-
based dependence and (b) induces greater exit barriers
for the customer, thereby increasing cost-based depen-
dence. Thus, although core offering capability is a
prerequisite to be considered a viable supply source,
the supplier’s operations capability appears to provide a
more solid basis for retaining key customers in the long
run.
Assessing both dimensions of customer dependence
sheds a significant amount of light on the “psychology
behind the development of customer loyalty” (Davis and
Mentzer 2006, p. 54). Benefit-based dependence stimulates
customer relational loyalty, which subsequently leads to
insensitivity to competitive offerings and intended purchase
expansion. In contrast, cost-based dependence erects
termination, disengagement, and switching barriers that
effectively reduce the customer’s sensitivity to competing
offerings, but does not affect relational loyalty or purchase
expansion. The carrot of benefit-based dependence alone,
in the absence of the accompanying stick of cost-based
dependence, leaves the supplier more vulnerable to com-
petitive offerings.
Although researchers have recognized important ramifi-
cations of interfirm dependence, our results highlight the
importance of the nature of customer dependence in the
marketing and supply chain contexts. We find empirical
support for the bi-dimensional conceptualization of benefit-
based and cost-based dependence (Scheer and Smith 1996).
Diverse dependence operationalizations have been used,
and many inconsistent and inconclusive results have been
found. The inherent inability of prior dependence measure-
ment approaches to capture potentially countervailing
100
effects of positively-motivated and negatively-motivated
dependence may help explain these findings. Focusing
on just one dependence dimension may be appropriate
when theory indicates that the focal construct is, indeed,
only benefit-based or just cost-based dependence. When
a party’s overall dependence on an exchange partner is
the focus, however, we contend that a more comprehen-
sive assessment of the nature of dependence that
incorporates separate measures of both benefit-based
and cost-based dimensions is needed to more fully
evaluate potential relationships between dependence and
other constructs.
This research also suggests that managers can cultivate
loyalty by segmenting their customers in terms of desired
value change (Flint et al. 2002). For the customers that
require relatively more intense change in the supplier’s value
propositions, more supplier resources should be devoted to
product design and implementation capability. A supplier’s
investments in operations capability are likely to generate
loyalty among these customers by increasing both their
benefit-based dependence and cost-based dependence on the
supplier. If customers desire greater constancy and less
drastic innovation in the supplier’s value propositions,
resources allocated to improving core offering or communi-
cation capability may pay greater dividends. By actively
collecting and analyzing market intelligence (Slater and
Narver 2000), by helping customers interpret environmental
changes, and by devising new offerings and value proposi-
tions in response to such changes (Flint et al. 2002),
suppliers can deepen customer dependence and loyalty.
Limitations and future research directions
Our findings should be considered in light of some
limitations. First, we employed a single key informant
cross-sectional design. Although proactive measures were
taken to alleviate common method bias, a multi-informant
design or longitudinal data may shed additional light on the
model tested. Second, our sample came from ISM whose
members tend to be larger firms with better qualified
purchasing professionals, potentially limiting the generaliz-
ability of our findings. As this study focuses on customer
relationships with manufacturers of highly customized
components, our findings may not generalize to supplier–
customer contexts that entail little customization (e.g.,
standardized commodities) or to other channel settings
such as wholesaler-retailer relationships. Finally, we took
the customer firm’s perspective in examining the relation-
ships among supplier’s capability, customer dependence,
and loyalty; the extent to which the supplier’s perspective
would yield similar results is unknown.
J. of the Acad. Mark. Sci. (2010) 38:90–104
Our study offers a number of future research directions.
We examined relational loyalty, insensitivity to competitive
offerings, and future purchase intent, but other indicators of
loyalty can be examined and the extent to which each of
these dimensions impact supplier financial performance
remains to be tested. Understanding the conditions
under which each type of loyalty may be more vital is
an important theoretical and managerially relevant
question.
Second, many important relational outcomes were not
included in our study. The extent to which supplier
capabilities and the two dimensions of customer depen-
dence may increase other, less positive attitudes and
behaviors such as calculative commitment, opportunism,
and coercive or negative power use should be investigated.
Also, we limited our focus to firm-level mediators. Given
the increasing evidence that interpersonal-level relation-
ships can impact firm-level constructs and outcomes (e.g.,
Kumar et al. 2007), it is also important to examine how the
effects of supplier capabilities on performance may be
mediated through interpersonal relationships.
Our investigation of benefit-based dependence and cost-
based dependence represents the first attempt to empirically
disentangle these two distinct components of dependence.
In our study, benefit-based dependence and cost-based
dependence demonstrate different patterns of relationships
with other constructs studied. This suggests that an
empirical synthesis of the dependence literature may reveal
systematic and critical differences in the antecedents and
the effects of measures that focus on benefit-based
dependence versus those that focus on cost-based depen-
dence. This may help explain why hypotheses regarding
dependence frequently have been rejected or rather weakly
supported in relational studies.
Finally, the bi-dimensional conceptualization of depen-
dence also raises questions regarding the channel interde-
pendence structure. It has been found that interdependence
magnitude and interdependence asymmetry have profound
effects on relational outcomes, behaviors, and performance
(Davis and Mentzer 2006; Kumar et al. 1995, 1998). To
what extent can we gain additional insights if these
interdependence structures are scrutinized for the nature of
dependence? Would the effect of dependence asymmetry
differ if it is grounded in the partners’ benefit-based
dependence versus cost-based dependence? The bi-dimen-
sional model of dependence and the Capability→Depen-
dence→Loyalty model offer intriguing directions for future
research.
Acknowledgement The authors thank the Institute of Supply
Management for their cooperation with this research.
J. of the Acad. Mark. Sci. (2010) 38:90–104 101

Appendix

Table 4 Appendix measures, loadings, and reliabilities

Standardized
factor
loading

Core offering capability (α=.824; 1=strongly disagree, 7=strongly agree)

The products of this supplier are of high quality. .814
We often complain about this supplier’s products. (reverse-scored) .631
This supplier’s product quality is excellent. .885
This supplier rarely delivers incorrect products. .647
This supplier rarely delivers wrong quantity. .604
Operations capability (α=.816; 1=very weak, 7=very strong)
Capability to design desirable new products for our firm. .822
Capability to accommodate our firm’s design changes within required deadlines. .516
Capability to improve the features of its products our firm purchases each year. .772
Capability to develop new technologies that enhance its products sourced by our firm. .768
Communication Capability (α=.905; 1=very weak, 7=very strong)
Capability to effectively communicate to our firm. .829
Capability to develop formal communication channels and procedures with our firm. .830
Capability to have productive communication with our firm. .896
Capability to develop informal communication channels with our firm. .652
Capability to encourage productive feedback and input from our firm. .765
Capability to provide our firm with timely information regarding problems it encounters. .667
Benefit-based dependence (α=.768; 1=strongly disagree, 7=strongly agree)
Our firm receives benefits from doing business with this supplier that couldn’t be fully duplicated with the next best alternative. .652
If we stopped sourcing components from this supplier, our firm’s products would be less attractive to our customers. .726
If our firm had to replace this supplier, the alternative(s) would not be as effective. .851
Cost-based dependence (α=.792; 1=strongly disagree, 7=strongly agree)
If our firm ended its business relationship with this supplier, it would be costly to locate and implement a replacement. .836
If our firm replaced this supplier, we would incur significant replacement costs. .878
It would be costly for our firm to end its business relationship with this supplier. .536
Relational loyalty (1=strongly disagree, 7=strongly agree)
Our firm will remain a customer of this supplier in the foreseeable future because of our strong relationship, not contract clauses. .733
Our firm’s purchase of the critical component from this supplier is driven by our firm’s strong relationship with this supplier, not N/A
the specific terms we are offered on this component.a
Our firm is a loyal customer of this supplier. .651
Insensitivity to competitive offerings (α=.767; 1=strongly disagree, 7=strongly agree)
If a competing supplier would reduce its price by a small percentage, we would switch and buy this component from that supplier .624
(reverse-scored).
Any small change in this supplier’s or a competing supplier’s product offerings could result in our firm changing our source for .728
this critical component. (reverse-scored)
Right now, we buy this critical component from this supplier, but that could change very quickly (reverse-scored). .798
Future purchase expansion (1=strongly disagree, 7=strongly agree)
In the next 3 years, a larger percentage of our firm’s purchases of this critical component will be sourced from this supplier.a N/A
Even if our firm increases its production volume, it is unlikely that we would increase the purchase volume of this critical .641
component from this specific supplier (reverse-scored).
If our firm increases our production volume, our purchase volume of this critical component from this supplier will also increase. .794
a
Items dropped based on confirmatory factor analyses
102
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