Muehlrath-etal-2016: The effect of fairness perceptions in agricultural business relationships: A PLS model

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The effect of fairness perceptions in agricultural business relationships: A PLS structural equation model

Daniel Mühlrath*, Irwa Issa**, Detlev Möller*

University of Kassel, Department of Organic Agricultural Sciences, *Faculty of Business Administration, **Faculty of Agricultural and Food Marketing

Keywords

Organizational justice theory; fairness; buyer-supplier relationships; organic farming; Switzerland; PLS modeling

1                     Introduction

The topic of fairness in agricultural buyer-supplier relationships has gained increasing importance in public reporting in recent years. While the focus of the debates is often on fair pricing, the topic can also be viewed from a broader perspective. The theoretical approach of justice in organizations (Organizational Justice Theory; Colquit 2001) offers an interesting perspective on this. Hornibrook et al. (2009) suggest transferring this approach - which originally stems from a more intra-organizational perspective - to business relationships in the food value chain. However, a concrete measurement model for the empirical analysis of business relationships in the agricultural context based on the organizational justice approach is not yet available.

The aim of this study is to transfer the generally quite mature measurement approaches to fairness perceptions in organizations to the context of inter-organizational agricultural business relationships in the food value chain. Based on a comprehensive written survey of Swiss organic farmers, the effect of farmers' perceptions of fairness on the outcomes and performance of the business relationship will be analyzed in a structural equation model.

2                     Methodological approach

In 2012, a standardized online survey was conducted among Swiss organic farmers (N=5663; purely random selection of 2000 farms). Among the participating farmers (n=595; response rate 30%), those were selected for further analysis (n=441) who focus on marketing their products to processors and retailers in Switzerland and not on direct marketing. Due to the exploratory nature of this study and the structure of the data collected, a non-parametric, variance-analytical structural equation modeling approach was chosen (partial least square, PLS; see Hair et al. 2014; software used: smartPLS3).

3                     Theory development and results of structural equation modeling

Theory development: The organizational justice approach considers the perceived fairness of the behaviour of a person with excess power (e.g. employer; here customer) from the perspective of the "weaker" party (e.g. employer; here supplier or farmer). With regard to the perception of fairness, a distinction is made between two to four dimensions: process fairness (PF) and distribution fairness (DF) as well as interaction fairness (IF), which in turn is subdivided into informational and interpersonal fairness. The results of a business relationship (organizational outcomes) are defined as beliefs and attitudes (here commitment and organizational citizenship behaviour, OCB) that are expected to influence performance (here quality, speed, dependency, flexibility, costs; supply chain performance objectives, QSDFC) if there are changes in the behaviour of individuals (here the customers) (cf. Colquit 2001).

Quality assessment of the reflective measurement model: The latent variables (constructs) of the organizational justice model were measured using reflective indicators. With a few exceptions (OCB, see below), the factor loadings of the indicators are >0.70, which indicates acceptable indicator reliability. All latent variables exhibit good construct reliability >0.72. With an average recorded variance (DEV) of >0.55, sufficient construct validity of the latent variables can also be assumed. Only the construct "OCB" is lower (>0.43); two dimensions are assumed here. Nevertheless, the results of a cross-loading test show that all constructs have acceptable convergence and discriminant validity (Fornell-Larcker criterion also fulfilled everywhere).

Assessment of the structural model: All path coefficients of the structural model (see Figure 1) are significant, albeit at different levels. The structural model can explain approx. 60% (^R2=0.590) of the variance of the construct performance of the business relationship. Thus, the present structural equation analysis underlines the effect of perceived process and distribution fairness in buyer behavior on the assessment of business relationship outcomes (commitment; OCB) as well as business relationship performance, as proposed e.g. by Hornibrook et al. 2009.

4                     Conclusions and outlook

The Organizational Justice approach could be transferred to the context of agricultural buyer-supplier relationships in this study. Process interaction fairness and distribution fairness have an effect on the performance of the business relationship as assessed by the participating farmers; the latter has the strongest overall effect, which underlines the importance of price in the perception of the farmers. Interaction fairness only has a direct effect, while process fairness is strongly mediated by commitment and OCB and distribution fairness has both a direct and indirect effect on performance. In further analyses, the influence of moderating variables (e.g. duration of the business relationship; farm structure) could be investigated.

Literature

Colquitt, J. A. (2001): On the Dimensionality of Organizational Justice: A Construct Validation of a Measure. Journal of Applied Psychology 86 (3): 386-400.

Hair, J. F. (ed.) (2014): A primer on partial least squares structural equation modeling (PLS-SEM). Sage Publ, Los Angeles.

Hornibrook, S., A. Fearne and M. Lazzarin (2009): Exploring the association between fairness and organizational outcomes in supply chain relationships. International Journal of Retail & Distribution Management 37 (9): 790-803.