13 Aug 2007  Research & Ideas

The Dark Side of Trust

It has been well documented that strong trust between a buyer and supplier provides many advantages, such as increased productivity. But according to new research coauthored by HBS professor Felix Oberholzer-Gee, trusting relationships can also have a negative side that managers must take into account. Key concepts include:

  • Many scholars agree that trust between suppliers and buyers generates significant benefits including motivating better performance and reducing negotiation time.
  • Breaking apart a trusted buyer-supplier relationship can be a significant barrier to entry for competitors.
  • The negative side of trust is that it can blind you to opportunities that arise outside established relationships.

 

It's called TrapGuard—a special kind of floor drain developed by a Georgia company that prevents sewer gases from entering homes. On the great spectrum of innovative products, it's probably not keeping company with the iPod or Segway scooter. But Harvard Business School professor Felix Oberholzer-Gee saw in TrapGuard, being marketed for the first time to plumbers in Philadelphia, an interesting way to better understand the link between trust and diffusion of new products.

With Victor Calanog, a doctoral student at the Wharton School at the University of Pennsylvania, Oberholzer-Gee authored "The Speed of New Ideas: Trust, Institutions and the Diffusion of New Products." [PDF]

The basic question at hand: Would TrapGuard encounter significant barriers to entry from plumbers who enjoyed trusting relationships with their suppliers? In other words, would plumbers be less likely to consider new products, even though innovative, because they were content with their current suppliers? The researchers also tested the specific difficulties faced by African Americans in breaking up existing buyer-supplier relationships.

The researchers conducted a field experiment involving the City of Brotherly Love's 596 plumbers and plumbing firms at the time of the study. Plumbers were sent a questionnaire to measure specific trust with their current vendors. Six weeks later, the plumbers received a TrapGuard promotional brochure. Some of the brochures pictured a white plumber, others a black plumber. Some brochures included a line that TrapGuard was certified by the International Plumbing Code, a set of standards developed by the International Code Council. Others did not.

A month later, the research team followed up with the plumbers. Had they heard of TrapGuard? (50 percent said yes.) Were they interested in receiving more details about the product? (60 percent yes.) How about a free sample? (81 percent affirmative.) Some 37 percent said they would consider using the product. In the end, 10 percent of the plumbers made a purchase during the first 12 months after the product introduction.

Statistical analyses show that the plumbers' responses varied systematically with levels of trust. Those who trusted their current suppliers were less likely to request a brochure (-13 percent), order a free sample (-6 percent), consider using TrapGuard (-18 percent), or purchase the floor drain (-6 percent). Interest in the product was much less when the promotional materials featured a black individual: 3 percent said they would consider the product when the brochure featured a black person, 14 percent in the other group. Certification by the International Plumbing Code boosted interest significantly.

We asked Oberholzer-Gee to discuss the research and the lessons for managers.

Sean Silverthorne: What interested you in doing research in this area?

Felix Oberholzer-Gee: In much of my research, I am concerned with "factors beyond the market" that influence the financial success of companies. In fact, I am teaching a second-year elective, titled Strategies Beyond the Market, in which we investigate these linkages.

Trust is obviously an important example for a factor beyond the market. Many scholars have studied the role of trust in business relationships and concluded that trust has important positive consequences. For example, trusted automakers spend significantly less time contracting and haggling with their suppliers. Similarly, we know that trust lowers the costs of negotiation and enhances supplier performance in electrical equipment manufacturing.

In this research, I wanted to see whether there was a downside to building trusting relationships between buyers and suppliers. In some sense, the study reveals a dark side of trust.

Q: In your study, you ask whether trust built up over time between a buyer and supplier can pose a significant barrier to entry to competitors offering innovative products. What were your main findings about how trust influences the speed at which new ideas and products diffuse in the economy?

A: We found that the companies in our study were much less interested in learning about a novel product if they trusted their current suppliers.

For example, they were much less interested in receiving promotional materials or a free sample. Companies that trust their suppliers were also less likely to purchase the novel product in our study.

Q: As part of your experiment, you tested the question of whether African Americans find it especially difficult to overcome trust barriers. Why did you look at this, and what were the results?

A: Great business ideas can emerge anywhere in the economy. In fact, as we know from a long line of research, many great ideas are generated outside well-established companies. So we wanted to see if trust posed an even higher barrier for minority groups. This is in fact the case. It is particularly difficult for African Americans to break into trusting buyer-supplier relationships.

Q: What can suppliers who currently benefit from a trusted relationship learn from your work? Should they actively promote trust with their buyers in some way?

A: Absolutely. Trust is an effective way to erect barriers to entry. Once a supplier has earned the buyer's trust, the buyer is less open to working with competitors—even if they offer superior products. In our study, plumbers were 13 percentage points less likely to order a free brochure of the competing product if they trusted their supplier. And they were 6 percentage points less likely to order the product.

Investments in trust pay off in that they reduce competitive pressures.

Q: What can buyers learn?

A: Trust is a double-edged sword. In the short run, working with trusted suppliers reduces transaction costs and furthers the buyer's competitive standing. This is the effect that has been emphasized in previous work.

But trust can also make you blind because it can make it harder to see opportunities that arise outside established relationships. The managerial challenge is to build trusting relationships without losing sight of outside opportunities.

This applies to contexts other than procurement. For example, in human resource management, managers face the challenge of balancing the advantages of working with trusted employees and the opportunities that come with bringing in fresh talent.

Q: What are you working on next?

A: I continue to investigate how factors beyond the market influence strategic decisions. In more recent work, I examine how the bureaucratic past of many of China's managers influences their diversification decisions.

About the author

Sean Silverthorne is editor of HBS Working Knowledge.