The influence of interpersonal relationships on interorganizational relationships in supply chains: the role of loyalty and conflict

Interfirm relationships play a crucial role in impacting organizational performance and have drawn significant research attention, including in the supply chain field. Many studies have examined the determinants of a successful buyer–supplier relationship (e.g. Kwon and Suh, 2004). Among a number of recognized practices in supply chain relationships, asset specificity or asset dedication is one of the key practices that has drawn significant research attention (Delbufalo, 2021). Specifically, the link between asset dedication and performance has been a major topic of interest in the supply chain literature and has implications in terms of incorporating legal contracts in the business relationships between suppliers and customers (Lui et al., 2009) to avoid the risk of opportunism and to realize the benefits of asset dedication. However, it is important to recognize that interorganizational relationships are implemented by the representatives (agents) of organizations; for example, a procurement manager from the buyer’s organization will usually be dealing with a sales manager from the supplier’s organization. Therefore, decisions made at the organizational level can also be affected by the interpersonal relationships between the representatives of both organizations in the supply chain (Durach and Machuca, 2018). Thus, failure to consider the role of interpersonal relationships will limit our understanding of supply chain relationships at the organizational level (Wang et al., 2018). However, the influence of interpersonal relationships on the quality and longevity of interorganizational relationships has been largely overlooked, which presents a surprising and important research gap in the supply chain literature (Gligor and Holcomb, 2013).

The dominant theoretical perspective informing the consequences of asset dedication in buyer–supplier relationships is transaction cost economics (TCE). Previous studies informed by TCE have examined the relationship between asset dedication and the use of contracts. For example, the study by Wacker et al. (2016) shows that suppliers’ asset dedication has a positive relationship with contractual governance, which in turn has a positive relationship with customers’ manufacturing performance. However, only a few studies have examined the moderating or boundary conditions of these interorganizational relationships (that is, to ask not if, but when these effects occur). To address this gap, we examine the boundary conditions of interpersonal relationships on the relationship among asset dedication, legal contracts and the benefits that suppliers derive from their relationships with customers.

In our study, we focus on positive (personal loyalty) and negative (personal conflict) interpersonal relationships between the representatives of supplier and customer firms. Our first research question addressed in this study focuses on whether interpersonal loyalty and interpersonal conflict between the representatives of suppliers and customers moderate the strength of association between the extent of legal contracts arising from suppliers’ asset dedication to customers. Furthermore, we also ask whether those conditions also influence the efficacy of legal contracts in delivering the benefits derived by suppliers from their relationships with customers. Combining both research questions, we examine how both personal-level loyalty and conflict moderate the indirect organizational-level relationship between asset dedication and the benefits that suppliers derive from customer relationships, mediated by the extent of legal contracts.

Interpersonal relationships have not received significant attention in the literature as studies in supply chain management have focused largely on interorganizational relationships, as mentioned earlier. However, it is well understood that interorganizational business relationships between suppliers and customers are conducted by and through the representatives (i.e. agents) of the two firms. Previous studies have shown the link between interpersonal and interorganizational relationships. For example, Wang et al. (2018) posit that interpersonal relationships are enablers of interorganizational relationships in building supply chain integration. The study by Saikouk et al. (2021) shows the cross-fertilization of trust between the interpersonal and the interorganizational level, and these two levels of trust contribute to the economic benefits of the supply chain partners.

While these studies provide us with some understanding of the dynamic nature of interpersonal and interorganizational relationships, it is not clear how interpersonal relationships play their role as the boundary condition of interorganizational relationships between suppliers and customers within supply chain contexts. The exception is the study by Do et al. (2023) that examines the moderating role of interpersonal social network on the link between firms’ innovation and internationalization. Despite the study showing that the effect is nonsignificant, it opens an avenue for research in considering interpersonal relationships as a conditioning factor of interorganizational relationships, which can be applied to business decisions in a supply chain context.

This study offers several contributions to the literature. First, we extend research on supply chain relationships by examining the role of legal contracts as a mechanism that explains the relationship between asset dedication and the expected outcomes in terms of benefits for suppliers. Second, to the best of our knowledge, this study is the first to examine the interaction between interpersonal and interorganizational relationships within a supply chain context. Most studies have examined supply chain relationships at the organizational level and have not given sufficient attention to the role of the interpersonal dynamics of the organization’s agents. As mentioned earlier, the relationship at the organizational level is manifested at the interpersonal level between the representatives of the related parties. Third, drawing on TCE and relational exchange theory (RET), we specifically examine two contrasting interpersonal relationships as conditioning (moderating) factors in supplier–customer relationships within the supply chain context.

Asset dedication plays a key role in interfirm relationships, including those in a supply chain. According to Williamson, an asset is specific to a particular transaction if its value in its next-best use (i.e. in a transaction with a different party) is lower than in the current transaction (Cuypers et al., 2021). In a supply chain context, suppliers or buyers invest in dedicated assets to increase the value and the benefits derived from the relationship with their supply chain partners. For example, suppliers may customize their processes (e.g. machinery or equipment) and products (or components) to meet the exclusive requirements or demands of specific customers (buyers). Similarly, buyers may adapt their product design to suit the specific components offered by their suppliers.

Literature has shown that asset dedication strengthens supply chain relationships and collaborations (Dyer, 1997). Asset dedication reflects the commitment and trust on the part of one party to invest in the collaboration with the other party to build a long-term relationship (Lai et al., 2013; Saxton, 1997). However, asset dedication also has a negative side where one party (i.e. the supplier) that invests in assets specifically for the other party (i.e. the customer), puts themselves at risk of losing the utility and the value of their investment if the relationship is terminated. In this case, suppliers who make a dedicated investment run the risk of carrying the dual burdens of huge investments on nonperforming or surplus assets and resources that are not easily allocated to other businesses (i.e. other customers). The situation is riskier when the relationships are characterized by power imbalance or unilateral dependency (Chris, 2001). Drawing on TCE, a high level of asset dedication in buyer–supplier relationships can result in lock-in hazards for the party that dedicates its asset, which will increase the risk of opportunism by the other party. As the potential for opportunism increases, a number of negative outcomes could ensue. For example, customers who believe that their suppliers are in a lock-in situation may attempt unilateral changes on the terms of the agreement or default on commitments specified in the contracts (Furrer et al., 2016; Lui et al., 2009). Therefore, in light of TCE, dedicated investments in assets for customers are more likely to be supplemented by the use of legal contracts as a safeguard to reduce the likelihood of customers engaging in opportunistic behaviors (Dyer, 1996).

Legal contracts are crucial in strengthening commitment and governance of the relationships between suppliers and customers. We follow Lyons and Mehta (1997) in defining formal contracts as agreements in writing between two or more parties, which are perceived as, or intended to be, legally binding. Formal contracts facilitate clear communication of expectations, roles, and responsibilities (Poppo and Zenger, 2002), which are essential for effectively managing complex supply chain relationships. Suppliers often dedicate assets, such as specialized production capabilities or customer service teams, to meet specific customer requirements. These assets represent investments in relationship-specific resources aimed at enhancing customer satisfaction and loyalty (De Vita et al., 2010). Legal contracts act as safeguards against opportunistic behaviors and uncertainties inherent in supplier-customer relationships. Contracts reduce the risks associated with asset specificity (Buvik and Reve, 2001), where suppliers invest in assets tailored to meet unique customer needs. By formalizing agreements on pricing, delivery schedules and quality standards, contracts mitigate the likelihood of disputes and provide mechanisms for resolving conflicts efficiently (Zacharia et al., 2011).

However, while legal contracts in supply chain relationships can sometimes be seen as signaling a lack of trust, they do serve more strategic purposes (DiMatteo, 2010). Legal contracts are often complex documents that are expensive to draw up and therefore serve as a signal to the other party about an ongoing commitment. Contracts help to clearly define the roles, responsibilities, and expectations of each party involved, which can reduce misunderstandings and potential conflicts. Contracts also provide a framework for resolving disputes and managing risks, which is crucial for maintaining smooth operations and ensuring compliance with regulations. In many cases, having a well-drafted contract can improve the relationship by giving both parties a sense of security and predictability. The presence of legal contracts facilitates supplier commitment to asset dedication by providing assurances of future benefits and returns on investment. According to Handfield et al. (2000), contracts enable suppliers to allocate resources strategically in order to increase production capabilities or to adopt innovative technologies that align with customer demands. This strategic alignment supports long-term relationship development and strengthens competitive advantages in dynamic market environments. Legal contracts also contribute to the sustainability of long-term supplier–customer relationships by fostering mutual dependence. Studies indicate that contractual agreements reinforce commitment and obligations, promoting collaborative problem-solving and continuous improvement initiatives (Tangpong et al., 2010). For instance, in supply chain partnerships, contracts facilitate joint investments in sustainability practices or new product development projects, driving shared value creation and competitive differentiation (Cao and Zhang, 2011).

Therefore, the use of legal contracts is a strategy applied by suppliers to secure the benefits they can derive from their asset dedication to the customers. In this case, the more specific the terms of the contracts, the stronger their legal binding and their effectiveness in reducing the uncertainty or risk that might undermine the achievement of the objectives stipulated in the contracts (Woolthuis et al., 2005). Furthermore, the study by Mwesiumo et al. (2018) shows the positive association between asset-specific investments (dedication) and the extent of formal contracting. Based on this notion, we consider that the larger the asset dedication that suppliers make as an investment in customers, the more extensive the legal contracts will be required for safeguarding the asset dedication to ensure that suppliers’ interests (in terms of the benefits expected from their relationship with customers) are protected and realized. Following this line of argument, we hypothesize:

Having hypothesized the mediating effect of legal contracts in interorganizational relationships, we deepen our study by looking at the boundary conditions of interpersonal relationships between the representatives of suppliers and customers. We argue that firms’ decisions to use legal contracts or to extend the legal contracts in their business relationships with other firms are not driven by the interpersonal relationships of their representatives. Instead, they are driven by the need for business relationships; in our case, this is the amount of suppliers’ assets dedicated to customers (as we examine in our mediating model and H₁).

In this regard, our investigation is based on the following two premises. First, we believe that the nature or the status of the relationship, at the interpersonal level, between the agents of the transacting firms may not necessarily be in harmony with the relationships at the interorganizational level. For example, the interpersonal relationship between the two agents can be cordial, especially if the two individuals have a strong friendship, while at the interorganizational level, the relationship between their firms may be contentious, for instance, due to unresolved problems. The opposite situation can also occur, where the interorganizational relationship between the two firms is robust (e.g. strong collaborations or even strategic alliances) while the interpersonal relationship between their agents is poor; for example, there may be personal conflicts that are outside the scope of the business relationships between their firms. Secondly, referring to our first point about potential misalignments between the conditions of interpersonal relationships and interorganizational relationships, we would expect that the organizational representatives will be able to limit the influence of their interpersonal relationships on their business-related decisions. However, studies have begun to indicate that this is not always the case. The study by Gligor and Holcomb (2013) shows that the relationship between agents can influence the relationship between the firms represented by these agents. For example, a buying firm (customer) can purchase products from suppliers who supply inferior quality items because there is a strong interpersonal relationship between the customer’s purchasing personnel and the supplier’s sales personnel. Alternatively, a purchasing manager of a buying firm (the customer) may decide to switch suppliers, not because of inferior quality products, but rather due to a personal conflict with the sales manager of the supplier. The study by Gedeon et al. (2009) shows the role of interpersonal relationships in promoting or hindering the dissolution of business relationships. These scenarios are plausible according to agency theory, which suggests that agents do not always act in the best interest of their principals and, therefore, may make business decisions that suit their personal interests, rather than their organizations’ interests.

In this study, we focus on two different boundary conditions of interpersonal relationships between the representatives of suppliers and buyers, namely personal loyalty and personal conflict (Plank et al., 2006). Loyalty reflects commitment and allegiance to a person (or an organization) where collaboration continues even when situations become difficult. Plank et al. (2006) refer to loyalty as the faithfulness of parties to each other. Loyalty is closely related to perceptions of relationship quality (Naudé and Buttle, 2000). Loyalty is also a construct closely related to trust and literature considers that trust is the foundation of loyalty. For example, the study by Jambulingam et al. (2009) shows that trust mediates the relationship between fairness and loyalty. The study by Wu et al. (2015) shows that commitment and trust increase the willingness of business customers and/or partners to participate and cooperate in specific asset investments, which later increases loyalty in the B2B relationship. Therefore, we consider that loyalty represents the positive state of interpersonal relationships between the representatives of suppliers and customers.

As we have postulated as part of H₁, from the TCE perspective, asset dedication will increase the extent of a legal contract, and the higher the level of asset dedication (especially in terms of economic values), the larger the use of legal contracts. In this context, we integrate the TCE perspective with RET, which suggests that relational norms promote bilateral trust and commitment between two related parties to achieve shared goals (Macneil, 1980), which includes suppliers and customers within a supply chain. The relational norms that are mutually built by the related parties define the accepted behaviors and consequently function as control mechanisms that promote positive behaviors (e.g. loyalty) and discourage negative behaviors (e.g. opportunism) (Chen and Lewis, 2023; Patil et al., 2023; Wang et al., 2024). In this regard, literature suggests that relational norms could complement legal contracts in governing supply chain relationships that moderate the need, the extent, or the enforcement of legal contracts (Cao and Lumineau, 2015).

Based on RET, we argue that, from the suppliers’ perspective, personal loyalty between their representatives and the customers’ representatives can be extrapolated into relational norms at the organizational level that can reduce the extensive use of legal contracts arising from asset dedication to customers. This is because their loyalty to customers’ representatives reflects the relational norms where suppliers would perceive less risk (for opportunistic behavior) in dedicating their assets to customers, thereby reducing the need for extensive use of contracts arising from asset dedication. According to RET, constructs such as loyalty (and trust) can complement formal governance mechanisms in reducing or eliminating opportunism. This is because suppliers would consider the relational values from the loyalty of their representatives in maximizing their expected benefits and minimizing their expected losses (due to opportunism) from their asset dedication to customers (Lumineau et al., 2022). Therefore, greater loyalty between firms’ representatives will reduce the extent to which suppliers use legal contracts to protect their asset dedication against opportunistic behavior from customers. Accordingly, we hypothesize the following:

By contrast, we expect that greater levels of personal conflict will increase the likelihood of suppliers making more use of legal contracts to manage transactions with customers to protect their dedicated assets. In the present study, we focus on affective conflict, defined as perceptions of disagreement or dislike of another person (e.g. with their personality or communication style). Research shows that affective conflict negatively affects relationship-focused variables (Plank et al., 2006). While they appear to represent conditions that are at odds, it is possible that an individual can have conflict with another person but remain committed to the interorganizational relationship that the two parties are part of. According to RET, as business transactions within a supply chain are enmeshed within a relational structure, the relationship between supplier and customer representatives is critical in terms of the quality of this type of long-term exchange. As aforementioned, relational norms are foundational in social interactions and personal conflict between supplier and customer representatives could erode and violate the relational norms between supplier and customer firms. This is because standards of conduct that are established between supplier and customer representatives and maintained through ongoing positive interactions are compromised by personal conflict (Gundlach, 1994). Furthermore, personal conflict between representatives of firms in a supply chain relationship can place at risk the firm-level relationship and, by implication, the supplier’s dedicated assets (i.e. bespoke facilities, idiosyncratic sales training or advertising targeting specific markets). In these circumstances, suppliers are likely to mitigate this risk by evoking more contractual safeguards to compensate for declining relational norms undermined by personal conflict. By making greater use of more formal governance mechanisms, such as legal contracts, suppliers can protect and leverage their high levels of asset specificity in the context of personal conflict (Gundlach et al., 1995).

Legal contracts between firms within a supply chain are mechanisms for dealing with control problems (e.g. misaligned incentives) and coordination problems (misaligned expectations and behavior) (Malhotra and Lumineau, 2011). Hence, legal contracts provide a structured framework by which to formalize the mutually agreed obligations of both parties, as well as stipulate sanctions and remedies that may ensue if obligations are not met. When personal conflict exists between supplier and customer representatives, each party is more likely to make negative attributions about their counterpart’s behavior (Kuwabara and Sheldon, 2012). Therefore, when relational quality decreases due to personal conflict between firm agents, suppliers can manage the risk associated with their dedicated assets by making greater use of contractual control and coordination provisions. It is also conceivable that personal conflict, which may manifest as negative behavior by a customer (as a firm), is viewed as a “harm” by the supplier. Consistent with the concept of RET, when the relational norms are at a low level, suppliers may perceive the need to increase the number of legal obligations specified in a contract as a way of protecting themselves. In such cases, asset dedication is better safeguarded against the perceived potential “harm” that might be caused by the customers as a result of interpersonal conflicts (Fehr and Gächter, 2000).

Moreover, personal conflict between supplier and customer representatives hinders communication, knowledge sharing and collaborative engagement. When personal conflict occurs, increasing their reliance on contractual provisions gives suppliers a more formal protocol for structuring negotiations and interacting with customers. Indeed, legal contracts provide a mechanism for dispute resolution by codifying reporting relationships, specifying roles, clarifying performance expectations and articulating the consequences of noncompliance. Therefore, suppliers can protect their dedicated assets by increasing their use of legal contracts to structure their ongoing communication and engagement with customers in the context of personal conflict between firm representatives (Ring and van de Ven, 1994). Accordingly, we hypothesize the following:

We now examine how personal loyalty and personal conflict are involved in the efficacy of contracts in realizing their benefits. In organizations, contract management requires a distinct set of activities to structure (definability) and then implement (enforceability) a contract (Zhang et al., 2020). Implementing a contract involves ensuring that the contract is followed and that the agreed-upon outcomes are achieved. Here, the focus is on the practical execution of the contract, including managing the relationship with the other party, monitoring performance and addressing any issues that arise. Managers track deadlines, deliverables and contractual obligations and adhere to all relevant legal and contractual requirements. The performance of both parties is assessed, any issues or delays are addressed and managers identify and address potential risks that may arise. Managers maintain open communication and address any concerns or disputes. The study by Cousins and Menguc (2006) shows that customers’ use of socialization mechanisms with suppliers enhances communication that eventually leads to suppliers’ contractual fulfillment. Hence, we assert that interpersonal relationships between the firms’ representatives may also have moderating effects on the relationship between the extent of legal contracts and the benefits that suppliers derive from their relationship with customers.

Specifically, as personal loyalty increases, the benefits of the interorganizational relationship will also be underpinned more by informal or social governance between suppliers and customers, rather than reliance on implementing and monitoring formal legal contracts (formal governance) in delivering the benefits from their asset dedication (Cuypers et al., 2021). It is also the case, according to RET, that when the relationship between firm representatives is characterized by personal loyalty, suppliers are less likely to make negative attributions to the actions of customers that are adversarial to their firms. Subsequently, suppliers are more likely to forgive minor transgressions by customers with whom they have a sense of personal loyalty built on repeated positive exchanges, rather than invoke provisions in their legal contract (Kuwabara and Sheldon, 2012) to derive benefit from the relationship. Hence:

On the other hand, conflictual relationships between firm representatives can negatively impact interorganizational relationships, which will increase reliance on legal contracts to ensure that expected benefits are delivered. Specifically, personal conflicts may drive rigid adherence to legal contracts in monitoring the implementation and the outcomes of the business relationships between suppliers and customers. Breakdown of communication between the firms’ representatives will undermine the level of trust between the related parties, which could increase the perceived high-risk of opportunistic behaviors. This situation would enhance the efficacy of legal contracts in determining the outcome of the business relationships (Poppo and Zenger, 2002). In the context of our study, suppliers may be more inclined to resort to legal enforcement in seeking assurance (certainty) of the benefits of their asset dedication in their business relationship with their customers. Personal conflicts between buyer and supplier representatives can also increase the likelihood of disputes across various dimensions of the business relationship. This is because suppliers may become more critical (instead of forgiving) toward customers’ behaviors, interpreting actions with suspicion rather than goodwill. This poor relational state will amplify the role of legal contracts, as parties are more inclined to rely on formal enforcement mechanisms to resolve disputes rather than engaging in informal negotiations or collaborative problem-solving (Wang et al., 2021). Accordingly, we hypothesize:

Integrating the moderating and the mediation arguments outlined above, we tested our full model, which postulates that there will be a conditional indirect effect of asset dedication on benefits derived from the relationships with customers that are moderated by personal conflict and personal loyalty, respectively.

The research model is illustrated in Figure 1.

We utilized an online survey panel provided by a social/market research firm (Qualtrics) of small-to-medium-sized enterprises (SMEs), which in Australia are defined as organizations with fewer than 200 employees. The research firm screened respondents to ensure that they were qualified to complete the survey. Of the 866 individuals who were contacted, 506 responded, delivering a response rate of 58%. The sample covered a wide range of industries, including manufacturing, retail, construction, transport and healthcare. The survey respondents were managers or senior managers who coordinate and facilitate business relationships with their customers (e.g. marketing, negotiation, sales, etc.). The use of a single respondent design aligns with the nature of this study and is commonly used in research on SMEs and supply chains (Kull et al., 2018). Before launching the full survey, a pilot study was conducted with 30 SME managers, and none of the respondents indicated any major concerns in completing the survey with regard to the clarity of content. Prior to analysis, the data were screened, and we found no careless responses (e.g. in the form of “straight line” responses). We received approval from the university's Human Research Ethics Committee before commencing this study.

For the data collection, we used previously validated multi-item scales (measured by a 5-point Likert scale). When answering survey items measuring asset dedication, legal contracts, and the benefits derived from the relationships with customers, respondents were asked to focus on their company’s major customer (i.e. the customer who contributes to the highest proportion of their company’s revenue). The scale measuring asset dedication was adapted from the study by Fink et al. (2006). This four-item scale measures the extent to which the suppliers have made significant investments in training and equipment that are adapted, tailored and dedicated to the requirements of their major customers. The scale assessing the extent of legal contracts was based on the measure used in the study by Blome et al. (2013). The four items measure the extent to which suppliers use formal written agreements to manage transactions with their major customers, and which specify the obligations of both parties, warranty policies, dispute handling and legal remedies. The scale assessing the benefits derived by suppliers from their relationships with customers (four items) was adapted from the study Kumar et al. (1992). This measure captures a range of benefits, including the generation of high revenue, market penetration and reputational benefits.

When responding to the survey items on personal loyalty and personal conflict, respondents were asked to focus on the particular manager (procurement, purchasing, etc.) representing the major customer with whom the respondents regularly have engagements in business negotiations and relationships. Both the personal loyalty and personal conflict scales were derived from the study by Plank et al. (2006). The personal loyalty scale reflects the strong relationship between, and the commitment to work with, the representatives of the major customer in the future, while the personal conflict scale measures the degree of affective conflict, that is, how much personal friction occurs with the representative of the major customer.

We conducted confirmatory factor analysis (CFA) to validate all five multi-item scales in this study simultaneously. As shown by the results (presented in Table 1), all fit indices support the unidimensionality and convergent validity of the measures (Bagozzi et al., 1991). The five scales also showed good construct reliability as their scores exceeded 0.70. The average variance extracted (AVE) values were also very close to 0.50 or higher, as recommended by Fornell and Larcker (1981).

Harman’s single-factor test was used to check for potential common method variance (CMV) on the dataset by performing an exploratory factor analysis where all items on the scales were subjected to extract a single factor, following the method by Podsakoff and Organ (1986). The results showed that the total variance explained by the single factor reached only 27.80%, which is well below the 50% threshold. Further, a CMV test was conducted, using the latent factor approach, whereby all 20 items were loaded onto one common factor as a competing measurement model (Podsakoff et al., 2003). The results produced a poor fit (Normed χ² = 28.14 and RMSEA = 0.23). These two tests confirmed no major problems with common method bias in the dataset.

The composite scores of the five scales were generated by calculating the means of the items of each construct. No violation of normality was found among the composite scores as indicated by the skewness and kurtosis values (±1 and < 7, respectively). The descriptive statistics (means and standard deviations) and Pearson correlations are presented in Table 2. The discriminant validity was further confirmed as the values of the square roots of the AVEs were higher than their corresponding intercorrelations of the composite scores of the five scales (Fornell and Larcker, 1981).

To test the hypotheses, we adopted a two-step approach suggested by Calantone et al. (2017). In step 1 (the mediated model), we tested the mediating effect of the extent of legal contracts on the relationship between asset dedication and benefits, and in step 2 (the moderated mediated model), we tested the interactive effects of both conflict and loyalty on the indirect effect. The mediated model controlled for suppliers’ age, suppliers’ number of employees, number of employees of the major customers and years in the relationship with the major customer. To help interpret the moderation effects, all variables were standardized before being subjected to the analysis. We used the PROCESS macro in SPSS to analyze the data.

In step 1, we tested a mediation model using Model 4 of PROCESS, with percentile bootstrapping of the indirect effect (5,000 replications). The results show that asset dedication had a positive relationship with the extent of legal contracts (β = 0.33, p < 0.01), and legal contracts also had a positive relationship with benefits (β = 0.31, p < 0.01). The standardized indirect effect of asset dedication on benefits was 0.10 with a 95% confidence interval (0.06 to 0.15) that does not contain 0; therefore, H₁ was supported. Meanwhile, the direct effect of asset dedication on benefits was also statistically significant when controlling for the extent of legal contracts (β = 0.27, p < 0.01).

In step 2, we tested the moderated mediated model using Model 75 of PROCESS and the results are presented in Figure 2. Contrary to H₂, the results show that personal loyalty positively moderated the relationship between asset dedication and the extent of legal contracts (β = 0.09, p < 0.01). Although not a formal hypothesis in our moderated mediation model, personal loyalty also had a direct positive relationship with the extent of legal contracts (β = 0.18, p < 0.01, respectively).

Figure 3 displays the interaction and shows that the effect of asset dedication on the extent of legal contracts is unexpectedly stronger when loyalty is high (+1 SD). Personal conflict had no statistically significant moderating effect on the relationship between asset dedication and the extent of legal contracts (β = 0.03, p > 0.05); therefore, H₃ was not supported. It is worth noting that personal conflict itself also had no direct relationship with the extent of legal contracts (β = 0.02, p > 0.05).

Looking at the right side of the mediating model, we found that personal loyalty negatively moderated the relationship between the extent of legal contracts and benefits (β = −0.06, p < 0.05) while personal conflict showed a positive moderating effect (β = 0.11, p < 0.01); therefore, both H₄ and H₅ were supported. Figure 4 indicates that the positive relationship between the extent of legal contracts and benefits is weaker when loyalty is high (+1 SD). Figure 5 shows that the positive relationship between the extent of legal contracts and benefits is stronger when conflict is high (+1 SD).

Further examination of the simple slopes showed that when the interpersonal relationships were at a high level (+1 SD) of loyalty and a low level (−1 SD) of conflict, the effect of legal contracts on benefits was weaker than the direct effect of asset dedication on benefits (0.13 versus 0.22, respectively). This indicates that the benefits from the relationships are largely derived from means other than the legal contract. The opposite occurs when interpersonal relationships are at a low level of loyalty and a high level of conflict (0.47 versus 0.22, respectively), indicating the stronger role of legal contracts in realizing benefits by enforcing fairness in business relationships.

Finally, to test H₆ and H₇, we looked at the changes in the magnitude of the indirect effect of asset dedication on benefits, via legal contracts, when one moderator varied from a low level (−1 SD) to a high level (+1 SD) and when the other moderator was held constant at the average value. Consistent with the unexpected moderation result for H₂, the results showed that at the low level of personal loyalty, the indirect effect produced an effect size of 0.07 with a 95% confidence interval of 0.02 to 0.13, while at the high level of personal loyalty, the effect size slightly increased to 0.09 with a 95% confidence interval of 0.03 to 0.17. Therefore, H₆ was not supported. Consistent with the earlier results, when personal conflict was at a low level, the magnitude of the indirect effect was 0.05 with a 95% confidence interval of 0.01 to 0.10, and when personal conflict was at a high level, the size of the indirect effect was 0.13 with a 95% confidence interval of 0.07 to 0.20. Therefore, H₇ was supported.

Consistent with TCE, the results of our study support the (partial) mediating effect of the extent of legal contracts on the relationship between suppliers’ asset dedication to customers and the benefits derived from the relationships with the customers (H₁). The finding that the effect of suppliers’ asset dedication on benefits accrued by the supplier from the relationship with customers is mediated by the extent of legal contracts in business relationships has significant implications. Legal contracts serve as a pivotal governance mechanism that formalizes agreements and expectations between suppliers and customers. According to Ganesan (1994) contracts not only mitigate uncertainties, but also facilitate relationship-building by establishing clear guidelines regarding performance and responsibilities. When suppliers dedicate assets such as specialized production capabilities or tailored services to meet specific customer needs, the presence of a formal contract institutionalizes these commitments, thereby strengthening the stability and longevity of the relationship. By establishing clear expectations and accountability, contracts facilitate a collaborative approach to relationship management, fostering innovation and operational excellence. This proactive management approach allows suppliers to continuously adapt to changing customer demands and market conditions, thereby sustaining their competitive advantage over time.

Our findings on the boundary conditions of interpersonal relationships between firms’ representatives are also significant. Specifically, personal loyalty as a moderator in supplier-customer relationships shows its dual influence on the relationship between asset dedication and legal contracts as well as the efficacy of legal contracts on benefits. As mentioned earlier, our finding for H₂ shows that personal loyalty strengthens the relationship between asset dedication and the extent of legal contracts, and this contradicts our hypothesis. In explaining this result, it is possible that when suppliers dedicate assets to customers, for instance, by customizing production capabilities or forming dedicated service teams, personal loyalty can strengthen the inclination to formalize these commitments through legal contracts. In this case, relational norms derived from personal loyalty complement legal contracts by creating a new contractual mindset that is oriented toward “win-win” as an enabling mechanism that facilitates the contracting process (Cao and Lumineau, 2015). This alignment of interpersonal bonds with contractual obligations can strengthen trust and commitment, thereby consolidating the partnership and reducing relational risks. Strategically, the positive (complementary) moderation on the asset dedication – legal contracts relationship by personal loyalty underscores its role in strategic alignment. Suppliers aligning their resources with customer needs obtain a competitive advantage by offering tailored solutions and improving customer satisfaction (Lavie et al., 2010). In this case, personal loyalty between the representatives of suppliers and customers can amplify this alignment, encouraging suppliers to invest in assets that specifically cater to customer preferences and needs, thus increasing the likelihood of formalizing these commitments through contracts. Interestingly, the absence of a moderating effect of personal conflict on the association between asset dedication and legal contracts (H₃) suggests that the asset dedication-contract link operates independently of interpersonal tensions.

To some extent, our results balance the view that legal contracts established for asset dedication signal a lack of trust from the firms that dedicate their assets to customers. Our results show that interpersonal conflicts (that potentially escalate into interorganizational conflicts) do not increase the strength of the relationship between asset dedication and the extent of legal contracts. On the other hand, personal loyalty strengthens the relationship between asset dedication and the extent of legal contracts. What we can infer here is that harmonious interpersonal relationships would encourage suppliers to increase the extent of the legal contracts to provide guidance and clarity on the implementation and the objectives of their asset dedication to customers. Clarity on the implementation and objectives for asset dedication is likely to be focal when facilitating the establishment of the contract. Therefore, it may be the case that cordial personal relationships between supplier and customer representatives provide greater latitude and less constraints when establishing contractual arrangements, emboldening suppliers to use legal contracts. Thus, the stronger the personal loyalty, the easier it is for suppliers to increase the extent of the legal contracts with their customers without fear of being judged as signaling their lack of trust in customers.

On the other hand, personal loyalty between the representatives of suppliers and buyers shows a negative moderation of the relationship between the extent of legal contracts and the benefits that suppliers derive from their relationships with customers (H₄), suggesting a complex interplay. This finding concurs with the study of Zhang et al. (2020) that demonstrates the negative interaction between contractual enforceability and relational governance in affecting suppliers’ performance. As discussed above, while personal loyalty may strengthen the association between asset dedication and legal contracts during contract facilitation and establishment, where clarity about objectives and uncertainty reduction are primary, the obverse may occur when enforcing the contract to realize benefits.

Indeed, as we proposed earlier, close positive interpersonal relationships can reduce the need to enforce formal governance mechanisms as connected parties rely on informal agreements instead of depending solely on legal contracts (Williamson, 1991). A strong sense of personal loyalty between firm agents may mitigate the need for legal enforcement of contractual obligations because it provides adaptability and commitment at the interpersonal level to address the inescapable hazards and uncertainties that occur in an interorganizational economic exchange (Poppo and Zenger, 2002). When personal loyalty is strong (weak), suppliers may perceive less (more) need to enforce strict contractual terms to realize the benefits of asset dedication. This phenomenon highlights the double-edged nature of personal loyalty in governance structures within business relationships. This is confirmed by our findings in relation to H_5, where the positive moderation by personal conflict on the relationship between legal contracts and supplier benefits highlights its role in strengthening the effectiveness of the contract. Under conditions of conflict, parties may rely more on formal agreements to mitigate risks and manage uncertainties (Williamson, 1991). Suppliers facing personal conflicts between representatives may prioritize the formalization of relationships through contracts to safeguard interests, ensure performance standards, and enhance the benefits derived from customer relationships (Fan et al., 2020).

From the perspective of relationship management, the impact of personal conflict on the extent of legal contracts and supplier benefits underscores the role of relational norms at the organizational level. Conflict can strain relational dynamics and also prompt parties to formalize agreements to maintain stability (Dyer and Singh, 1998). Suppliers navigating personal conflict may leverage legal contracts to foster transparency, accountability and mutual understanding with customers, thereby strengthening relational bonds and enhancing long-term relational outcomes. The personal conflict between the representatives of suppliers and customers may lead supplier firms to be more cautious about the actions of customer firms and therefore strengthen the need for contractual governance to safeguard the benefits and to protect against customers’ potential negative behaviors. In sum, integrating the results, we can see that the efficacy of asset dedication (via legal contracts) is strongest when loyalty is low and conflict is high, demonstrating the influence of interpersonal relationships on interorganizational relationships.

Overall, the findings of this study have theoretical implications for operations management, supply chain management, and strategic management literature. We have integrated TCE and RET to capture the complex interaction between interpersonal relationships and interorganizational relationships. As Lumineau et al. (2022) suggested, combining TCE and RET opens avenues for studies that advance our understanding of the mechanism and the effects of asset dedication within supply chain relationships as the two theories “converge in their interest in the effects of asset specificity but diverge in their respective assumptions and explanatory mechanisms” (p. 86).

In the mediation model, we found that suppliers’ asset dedication to customers is positively associated with the benefits the suppliers derive from their relationships with the customers, via the extent of legal contracts. This finding is consistent with TCE, which emphasizes that firms’ objectives are to maximize performance and to minimize costs in their business transactions. Our study shows that suppliers that dedicate assets such as specialized production capabilities, inventory management systems or customer service teams to meet specific customer requirements are more likely to seek formal contracts in order to safeguard their interests.

In our moderation and moderated-mediation models, we have shown how interpersonal relationships between firms’ representatives, in the form of personal loyalty and personal conflict act as boundary conditions. Specifically, our findings highlight the dual role of personal loyalty in contract formation and contract enforcement with it strengthening the former and weakening the latter. On the one hand, we found that personal loyalty can help strengthen contract formation, and on the other, when personal loyalty is weak, suppliers are more likely to enforce legal contracts to realize the benefits of asset dedication. Similarly, in the case of personal conflicts, legal contracts are used to ensure that suppliers benefit from their relationships with customers. Overall, the findings demonstrate how, from the RET perspective, interpersonal dynamics have a significant influence on interorganizational relationships as captured through TCE.

The findings of this study offer several implications for practice. Firstly, the findings highlight the effectiveness of legal contracts in ensuring the expected outcomes of asset dedication. As mentioned earlier, legal contracts can serve not only as an important safety net for business transactions in case of incidents that could raise the potential for opportunistic behaviors from the stronger parties. Secondly, our findings confirm the potential influence of interpersonal relationships between organizational representatives (agents) on the interorganizational relationships between the firms that they represent. Therefore, we suggest that managers reconsider the notion that there is a clear demarcation between personal matters and business matters. Instead, managers need to be aware of the influence of the interpersonal relationships between their representatives, who play an agency role in the firms’ relationships with other firms at the organizational level. Consequently, managers need to give equal attention to relationships at both personal and organizational levels. Thirdly, in conjunction with the previous point, firms need to encourage their supply chain representatives to build a good rapport with the representatives of the other firms and resolve any personal conflicts as soon as possible before they impact the firms’ relationships. Improving the quality of interpersonal relationships would benefit both suppliers and customers in strengthening and formalizing their relationships through legal contracts. Specifically, personal loyalty would help managers view legal contracts as a means of strengthening the relationships rather than as a signal of distrust.

Furthermore, when the interpersonal relationships between firms’ representatives are harmonious, the benefits of asset dedication can be realized without overly enforcing behavior through the extensive use of legal contracts and compliance. Encouraging and facilitating good personal relationships between suppliers and customers would advantage firms through reducing the transaction costs in terms of legal fees, auditing, and monitoring typically associated with enforcing legal contracts (Zaheer and Venkatraman, 1995). Reduced reliance on legal contracts and greater utilization of informal mechanisms also have the advantages of improved adaptability, greater information sharing, and more efficient problem solving (Poppo and Zenger, 2002). However, it is the case that personal loyalty, by its very nature, is idiosyncratic and variable. Thus, employees may leave their organization (and with them their loyalty) or personal loyalty may be eroded by perceived personal slights or transgressions by one party. Hence, legal contracts will always play a significant role as a safeguarding mechanism in the absence of personal loyalty or when firms’ representatives conflict with each other, whose impact can be escalated to the organizational level. In this case, firms need to rely more on structured governance frameworks and conflict resolution mechanisms within contractual agreements to mitigate the potential negative impact of interorganizational conflict that arises from personal conflict. In other words, legal contracts will help ensure the fulfillment of the goal of interorganizational relationships in situations of personal conflict. Finally, we recommend that firms need to establish behavioral guidelines when conflict occurs or when loyalty is undermined.

Our study has some limitations. Firstly, it was cross-sectional and, therefore, we recommend using a longitudinal design to capture the dynamics of both interpersonal and interorganizational relationships over time. Secondly, our study is based on suppliers’ perceptions; however, we believe that the quality of relationships would be better understood if examined from the perspectives of both parties. In this regard, we recommend that future studies employ dyadic designs involving suppliers and customers to capture reciprocal actions from both parties in their business relationships. Thirdly, our sample is comprised of small-to-medium-sized firms (SMEs); therefore, we recommend that future studies replicate our research model in large firms where legal contracts governing business relationships are more commonplace. Fourthly, we recommend a comparative analysis of the relationship between suppliers and customers in different cultural contexts, particularly regarding the role of interpersonal relationships. Finally, future studies could look at more fine-tuned conceptualizations and operationalizations of the interpersonal constructs we studied, for example, examining both the cognitive and affective dimensions of conflict (Plank et al., 2006).

In closing, by integrating TCE and RET, our study shows that only interpersonal loyalty affects the relationship between asset dedication and the extent of legal contracts. Further, personal loyalty and personal conflict show contrasting moderating effects on the relationship between the extent of legal contracts and the benefits derived by suppliers. Understanding the influence of interpersonal factors on interorganizational relationships is crucial for optimizing buyer-supplier interactions as the foundation of sustainable partnerships that will maximize mutual benefits in the relationships.