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A Typology of Hybrid Governance: Proposal and Empirical Validation
Mani R. Subramani, [email protected]
3-358, Carlson School of Management, University of Minnesota 321, 19th Avenue S, Minneapolis, MN 55455
Tel: (612) 624-3522, Fax: (612) 626-1316
John C. Henderson, [email protected]
School of Management, Boston University 595 Commonwealth Avenue, Boston, MA 02215
Tel: (617) 353-6142, Fax: (617) 353-5003
Work in Progress
Paper presented at the 1999 Academy of Management Conference, Business Policy and Strategy (BPS) Division, Chicago, IL.
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A Typology of Hybrid Governance: Proposal and Empirical Validation
Abstract
Firms are increasingly selecting hybrid governance in interfirm relationships to execute a wide range
of activities. To aid cumulative theory building, we propose a typology of hybrid governance
identifying four types characterized by the levels of two types of asset specificity pertaining to
intangible assets: process specificity and expertise specificity. We validate the typology this using data
from 218 interfirm relationships.
Keywords: Hybrid Governance, Typology, Empirical Validation
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A Typology of Hybrid Governance: Proposal and Empirical Validation
Section 1: Introduction
We are in the midst of actively rethinking the logic of economic organization: the existence of firms
and the determinants of the choice between hierarchical governance, market governance and hybrid
governance, also termed nonmarket1 governance. Firms appear to be increasingly moving away from
the market governance vs. firm governance dichotomy, forming cooperative interfirm arrangements
such as partnerships and alliances to execute a broad range of activities that were erstwhile exclusively
carried out within organizations. In many contexts, hybrid organizational arrangements involving
constellations of multiple firms are becoming established as a model for success (Badaracco 1992). We
observe as a result, that the governance of most exchanges is hybrid and that the distribution of
exchanges in the spectrum spanned by markets and hierarchies at polar endpoints has a swelling
middle. We are just beginning to lay the foundations for a theoretical understanding of the issues
underlying these shifts, changes considered as significant for organizations as the shift to moving
assembly lines (Teece 1992).
Section 2: Hybrid Governance
Governance, in the context of contractual relations refers to the “institutional framework in which
contracts are initiated, negotiated, monitored, adapted, enforced and terminated” (Palay 1984, pp.
265). Traditionally, transaction cost economics (TCE) has considered the market and the hierarchy as
the two generic governance choices available to firms (Williamson 1975). However, recent
formulations have extended the conceptual apparatus of TCE and recognized the existence of a
third governance form termed the ‘hybrid’ (Williamson, 1994). As the name suggests, this generic
1 We consistently use the term nonmarket governance (Heidi 1994) while referring to hybrid governance arrangements in interfirm
relationships
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governance alternative incorporates certain attributes of both markets and hierarchies but blends
them to generate a unique environment in the exchange, distinct from those observed in markets
and hierarchies (Williamson 1994).
Recent conceptual refinements of the governance of interfirm interactions suggest that non-
hierarchical governance arrangements may be viewed as belonging to two broad forms: market
governance and hybrid governance (Heide 1994). Buyers and sellers performing clearly defined roles
predetermined by contracts that are planned in advance characterize market governance. Parties in
interfirm interactions under market governance act to maximize their own outcomes in the course
of each discrete set of transactions between them and the time horizon is limited to the duration of
the contract as the relationship terminates at the end of this period. In contrast, hybrid governance is
characterized by buyers and sellers engaged in exchanges that, while governed by commercial
contracts of fixed duration, are supported by informal social mechanisms that maintain a continuity
of interactions over multiple contracting periods. In hybrid exchanges, the parties have overlapping
roles incorporating joint activities that enables the ongoing negotiation and modification of activities
in response to circumstances as they arise. In essence, hybrid governance mechanisms provide
parties with considerable flexibility in operation and enable temporary inequities such as asymmetric
investments among partners to be sustained in the short run as overall equitable outcomes are
mutually ensured over multiple periods of interactions (Macneil 1980, Heidi and John 1992). Rather
than engaging in discrete transactions, the parties participate in an ongoing relationship.
Our understanding of hybrid governance is largely drawn from a substantial body of qualitative
research providing descriptive accounts of contexts of hybrid governance (e.g. Gomes-Casseres
1994, Kanter 1989, Macneil 1980, Powell 1990). The picture of hybrid governance that emerges is
one of firms working together closely, each providing unique capabilities and resources and jointly
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deriving advantages that neither party could derive on their own. Over multiple periods of
interaction, relatively stable patterns of interaction between multiple independent firms in hybrid
exchanges lead to the evolution of organizational networks that provide significant benefits to
organizational participants (Nohria 1992).
The perspectives in the considerable body of literature on hybrid governance reflect the concerns of
individual disciplines examining the phenomenon. For instance, the role of shared norms of
behavior among channel members and the nature of influence strategies is a central concern in
marketing studies (e.g. Macneill 1990, Heide 1992). The competitive implication of inclusion and
exclusion in firm networks receives considerable attention in the strategy literature (as in Gomes-
Casseres 1994) while the nature and role of implied contracts in cooperative arrangements is the
focus in from the legal perspective (Palay 1984). Similarly, the enabling role of information
technologies in central to the examinations of hybrid governance in the IS literature (Bakos and
Brynjyolfsson 1993, Clemons, Reddy and Row 1993, Venkatraman 1994) and the role of trust and
exposure to risk are central in organization theory based examinations of hybrid governance (Barney
and Hansen 1994, Ring and Van de Ven 1992, Zaheer and Venkatraman 1995).
This multitude of studies is analogous to a large number of individual snapshots of a large vista, each
framing an arbitrary scene. What is missing is a systematic organizing framework such as a typology
to bring the individual pieces together to evolve a composite that can effectively direct further
action. This sentiment is reflected in the appeal for coherence in research examining intra and
interorganizational relationships across multiple disciplines (Smith, Carroll and Ashford 1995). A
framework such as a typology would simplify the apparent complexity, and foster further theoretical
advancement.
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An initial proposal from Heide (1994) suggests that hybrid governance may comprise two forms:
unilateral governance and bilateral governance. However, this is essentially a question of partitioning
exchanges on the basis of the degree of hybrid governance on a low-high scale. Bensaou and
Venkatraman (1995) empirically identify five relationship configurations in an analysis of the
attributes of buyer-supplier exchanges in the auto industry: structural relationship, remote
relationship, electronic control, electronic interdependence and mutual control. These types were
interpreted from coherent clusters in a multidimensional space spanned by 19 relationship attributes.
While very useful, this scheme falls short of a meaningful articulation of interorganizational
relationships because of the abstract nature of the conceptualization.
There also exist several intuitively developed frameworks, that attempt to order hybrid governance
phenomena, largely based on compelling anecdotal evidence with considerable face validity (e.g.
Venkatraman and Kambil 1991, Lewis 1995). However, the contribution of these schema to the
systematic examination of hybrid governance is limited without empirical validation; a critical
prerequisite for establishing organizing schema (McKelvey 1982).
In addressing this issue, we present a conceptual typology of hybrid governance that suggests that
hybrid governance may be conceived in terms of four mutually exclusive and collectively types of
governance arrangements. We also report the results of a study to examine the empirical support
for this proposal, employing tests consistent with the literature on organizational systematics (Pinder
and Moore 1979). The rest of the paper is organized as follows: Section 3 discusses the utility of
typologies and the relevance of typologies to theory development. Section 4 explains the typology
proposal, followed by Section 5 discussing the analytical scheme for validation of typological
properties. Section 6 discusses the methodology to collect field data, Section 7 presents the analysis
and results. Section 8 concludes with a discussion of the findings.
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Section 3: Typologies
Typologies are theoretical devices to parsimoniously characterize complex phenomena. Typologies
have been proposed for a range of phenomena at different levels of analysis e.g., multinational
networks (Ghoshal and Bartlett 1990), organizational structure (Mintzberg 1989) and
transformational leadership (Tichy and Devanna 1986). The strength of typologies is their ability to
distill complex reality into coherent types or categories. The multiple categories suggested by
typologies are regimes with homogeneous characteristics within which variance in patterns that
theorists seek to explain is maximal (McKelvey 1982). In these coherent domains, the uniformity of
patterns makes them more salient in comparison with the noise surrounding them, increasing the
chances that they can be observed. Typologies are consequently useful for phenomena where
conceptual development is limited as they lay the ground for the creation and testing of theoretical
formulations.
Typologies can be viewed as complex theoretical statements embodying a grand theory underlying
the classification (Doty and Glick 1994). For instance, the typology of strategic choice suggested by
Porter (1980) describes three types of generic strategies that can be adopted by firms: cost
leadership, differentiation and focus. The grand theory implied by the typology, applicable across all
manifestations of the strategy in organizations and contexts, is that organizational performance is
maximized by conformance to one of the three generic strategy choices.
Typologies also provide the framework for the generation of middle range theories (Weick 1974)
applicable between and within the coherent domains they identify (McKelvey 1982, Pinder and
Moore 1979). For instance, the typology of strategic choice (Porter 1980) forms the basis to
hypothesize that firms adopting different generic business strategies are likely to make systematically
different firm choices in other key aspects as well. Analogously, hypotheses concerning the similarity
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of organizations adopting the same generic business strategy are also derived from the typology of
strategy choice. Typologies thus provide powerful organizing frameworks for complex phenomena,
encouraging the generation of testable hypotheses and advancing theory development.
Section 4: A Typology of Hybrid Governance
The generation of typologies is inherently a creative and intuitive process of pattern seeking among
the commingled manifestations of multiple individual factors and suggesting a compact conceptual
scheme that captures the essence of the variation (McKelvey 1982). The typology of hybrid
governance is derived from two consistent patterns that recur in the studies of cooperative
interorganizational relationships:
1. Hybrid Governance arrangements occur in contexts requiring access to or the deployment of unique resources:
Hybrid governance is the governance structure of choice in contexts requiring the combination
of unique resources and expertise that are developed and nurtured within the environments of
multiple specialized firms (Piore and Sabel 1984, Powell 1990, Anderson and Weitz 1992). It is
the ability to enable a highly customized and context specific deployment of such resources by
multiple firms in exchanges that gives hybrid governance its unique character. For instance,
hybrid governance arrangements in the auto industry exist between auto assemblers such as
Toyota and their suppliers: specialist firms concentrating on maintaining state-of-the-art
capabilities in component technologies such as fuel injection and drive trains. In creating new
car models, the suppliers work closely with Toyota, often deputing personnel to work in the
manufacturer’s development group, ensuring that the highly specialized expertise of the supplier
firm is utilized in the design of new vehicles (Dyer 1996).
This emphasis on the nature of resources as the determinant of governance form is consistent with the
fundamental premise of the Resource Based View of the firm that considers resource attribures the
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key drivers of governance choice (Barney 1991,Conner and Prahalad 1996 ). In particular, two types
of intangible firm resources appear to be central to value creation by firms:
a) the standard operating processes; the routines of the firm that have been refined over time,
encoding the firm's understanding of cause-effect relationships (Dierickx and Cool 1989, Nelson
and Winter 1982) and
b) the skills and competencies of the firm; the tacit knowledge, the uncodifiable firm specific
vocabulary and the shared understanding of key issues cultivated and refined within the firm
(Barney 1991, Zander and Kogut 1995, Montverde 1995).
2. Hybrid Governance arrangements involve specialized and unique reconfiguration of resources in the context of the
exchange: In the examination of the considerable competitive advantage of Japanese automakers
over their US counterparts (Dyer 1996), the central thesis is that it is derived from the customer-
specific deployment of Japanese suppliers' physical assets, production capacity and product
knowledge encouraged by the cooperative supplier relationships. This corroborates the range of
evidence that cooperative interfirm relationships enable the leverage of valuable assets and
resources that are committed to the exchange (Palay 1984, Henderson 1990).
Empirical Evidence on the Importance of Intangible Assets in interfirm exchanges: The importance of intangible
investments is accentuated by recurrent empirical findings in multiple studies that point to the
central role of intangible assets in determining the governance choices of firms. Studies of decision
contexts as diverse as component procurement in the aerospace industry (Masten 1984, 1988), truck
fleet ownership in the transportation industry (Maltz 1993) and the choice of compensation schemes
for salespersons (Anderson and Schmittlein 1984) reveal the specificity of intangible assets in the
form of human capital to be the central issue determining the choice of governance form for the
activity. A recent study in the semiconductor industry (Monteverde 1995) provides compelling
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evidence that the choice of in-house semiconductor fabrication or outsourced semiconductor
fabrication by semiconductor design firms hinges on the level of intangible investments in specialized
communication codes required to effectively interface these two functions. The cumulative evidence
across these studies strongly suggests that intangible assets are significant in determining the
character of interfirm relationships manifesting hybrid governance arrangements.
Following this line of reasoning we believe that the examination of the role of intangible assets in
ongoing interfirm relationships could enable a significant refinement of our understanding of the
antecedents of hybrid governance. Recent research on intangible value creating resources employed
by firms suggest that they can conceived as comprising two components: know-how and know-what.
(Kogut and Zander 1992). Know-how refers to the firm level understanding of task execution, the
intangible investments that firms make to conceive tasks and create standard operating procedures
for efficient task execution. The other component of intangible resources, ‘know-what’, refers to
context sensitive, tacit understanding of subtleties that allows effective action and the resolving of
ambiguities in task planning and execution. We argue that relationship specific intangible
investments by firms in interfirm exchanges can be conceived in terms of these two dimensions of
intangible resources. Please see Appendix-1
The typology of hybrid governance we propose is illustrated in Figure 1. The formative axes for this
typology are Process Specificity and Expertise Specificity: the level of non-redeployable and
specialized resource commitments in creating relationship specific processes and expertise. The
choice of these axes for the typology is consistent with the logic that interfirm relationships are
created and maintained by firms to leverage specialized capabilities and resources that complement
their own core competencies (Quinn 1992, Venkatraman 1997). In effect, the typology suggests that
the confluence of process specificity and expertise specificity creates contexts where hybrid
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governance mechanisms of different types are encountered. The typology thus frames the
distribution of hybrid governance types on the market to hierarchy continuum in terms of two
fundamental dimensions that mirror the nature of specialized resource deployments underlying value
creation in relationships.
For clarity of reference to the different types, we use a descriptive labeling scheme consistent with
their distinctive characteristics: Market Exchange (ME), Process Dominant (PD), Expertise
Dominant (ED) and Strategic Relationship (SR). Market Exchange is the term used for exchanges in
the lower left quadrant of the typology where both the levels of process specificity and expertise
specificity are low. We term the opposite corner Strategic Relationship, reflecting the high level of
deployment of both specialized processes and specialized expertise in the exchange. The off-
diagonal quadrant marked by high levels of expertise specificity but lower than median levels of
expertise specificity, we term Expertise Dominant. The other off diagonal quadrant where there is a
high level of process specialization but relatively low levels of expertise specificity are termed Process
Dominant. In effect, the typology unpacks the swollen middle of the governance spectrum to propose
the existence of four distinct types of exchanges that are characterized as hybrid.
The typology is consistent with TCE in suggesting that the choice between governance alternatives
is determined by the need for specialized non redeployable investments in the exchange. The hybrid
governance typology proposes an extension of the RBV by suggesting that hybrid governance
structures and firm based organization are viable alternatives even when specialized resources (e.g.
specialized processes and specialized expertise) are involved.
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Figure 1: Typology of Hybrid Governance
Strategic Relationship
Process Dominant
Expertise Dominant
Market Exchange
Expertise Specificity
Proc
ess
Spec
ifici
ty
Low High
Low
H
igh
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Section 5: Theoretical Properties, Analytical Validation Scheme
Several analytical techniques have been proposed for typology validation in the literature on
organizational systematics: the eclectic discipline that seeks to discern order and articulate systemic
patterns in the occurrence of organizational phenomena (Doty, Glick and Huber 1993, Hambrick
1983, McKelvey 1982, Rich 1992). These include ANOVA and t-tests to highlight attribute variation
across clusters (Hambrick 1983), the use of regressions to relate cluster membership and cluster
properties to dependent variables (Doty, Glick and Huber 1993, Hambrick 1983, Venkatraman and
Prescott 1990) and the examination of equifinality across types (Doty, Glick and Huber 1993).
We perform a set of complementary analytical tests to validate the properties of the typology: a)
orthogonality of defining dimensions, b) equifinality of outcomes, and c) variation in relationship
management mechanisms across multiple governance types.
Property 1: Orthogonality of Defining Characteristics
The fundamental requirement of the characteristics defining a typology is that they be independent
(Sneath and Snokal 1973). Significant correlation between the axes violates the logic of independent
choice among the defining characteristics of the typology. The orthogonality of the axes defining a
typology reflects the parsimony in conceptualization, an important attribute of typologies.
To test for orthogonality of process specificity (ps) and expertise specificity (es), we employ two
tests of the magnitude of correlation between them: a strong form test and a weak form test. With the
strong form test, we examine if the correlation between ps and es is zero. If this hypothesis is not
supported, i.e. if ps and es are correlated either positively or negatively, we perform the weak form test
to examine if the correlation is acceptably small.
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Correlations between less than 0.3 among factors in social science research are considered small and
those between 0.3 and 0.4 are considered to be of medium magnitude (Cohen and Cohen 1983).
Consistent with this yardstick, we choose a threshold value for the correlation of 0.35 for the weak
form test. The intuitive interpretation of this statistical test is that the correlation is considered
acceptable if one construct explains less than 12.25 percent of the variation in the other. The strong
form and the weak form tests are summarized in Table 1.
Table 1 Tests for Orthogonality of Defining Characteristics
Nature of Test Hypotheses Strong form: correlation of es and ps is zero HS: rps.es ? 0
H1: rps.es = 0 Weak form: es and ps are minimally correlated (one explains 12.5 percent of variance in the other)
HW: rps.es ? 0.35 H1: rps.es ? 0.35
Property 2: Equifinality
The purpose of typology creation is to identify a relatively small number of gestalts that elegantly
capture the fundamental nature of complex phenomena. Conclusions based on typologies must
conform to theoretical expectations for the typology to be a valid representation of reality.
Evidence of correspondence of typological predictions to theoretical predictions is consequently
important in the validation of typologies (Sneath and Snokal 1973).
The efficient governance hypothesis of TCE suggests that the choice of the appropriate governance
mechanism among alternatives, ceteris paribus, leads to efficient performance (Williamson 1985). In
the case of the typology of hybrid governance, this implies that similar performance outcomes
would be observed across the four types as firms, on average, make efficient governance choices.
Evidence for equifinality is provided by the absence of significant performance differentials between
the four types of relationships identified by the typology. Support for equifinality would suggest a
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lack of an inherent bias toward a particular hybrid governance type. In the test for equifinality, we
examine both the global hypotheses of no difference across all types and individual pairwise
hypotheses of no difference between individual types.
H0a: ? (market exchange) = ? (expertise dominant)= ? (process dominant) = ? ( strategic relationship);
H0b: ? (typei) = ? (typej), for i ? j ;
Property 3: Patterns in Relationship Characteristics
Systematic patterns of variation in the characteristics of constituent types is an important property of
typologies (Ketchen and Shook 1996). The central character of interorganizational relationships is
closely linked to the nature of management processes employed. Even the terminologies commonly
used for different types of relationships such as partnership, alliance, and transaction (Anderson and
Narus 1990, Dyer and Ouchi 1993, Bakos and Brynjyolfsson 1993a,1993b) evoke the dominant
character of the orientation in the exchange: close, cooperative and mutually supportive in the case
of partnerships and alliances, arms-length, self-oriented and opportunistic in the case of transactions.
In validating the typology, we therefore focus on the variation of relationship management
mechanisms among the different governance types. We examine if the patterns of similarity in
characteristics of relationship management mechanisms within each type and variation in
relationship management mechanisms among different types reinforces the typology. In effect, we
seek to verify the extent to which the typology systematically partitions variance in the occurrences
of relationship management mechanisms, highlighting contexts of coherent choices.
Relationship Management Mechanisms
Prior research suggests a variety of relationship management mechanisms that are important in
interfirm exchanges. These include the extent of management focus on the relationship (Dyer 1996,
Lewis 1995), the nature of communication (Sproull and Kiesler 1992), performance control
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(Applegate 1995, Eisenhardt 1985, Kanter 1989), the social context of the exchange (Gambetta
1994, Hill 1990, Nohria 1992) and the use of information technologies (Huber 1990, Sethi and King
1994, Sproull and Kiesler 1992).
Management Focus
Differences in management focus are consistently highlighted in normative, prescriptive discussions
of the management of relationships. The expectation is that close cooperative relationships leverage
the expertise and capabilities of firms involved because of the priority accorded to addressing
problems if any and increased focus on delivering value by personnel in the organization (Lewis
1995). Transactional relationships in contrast are accorded less priority and managed less closely.
Patterns of Communication
We focus on the level of two types of communication: non-routine, unstructured communication
and routine communication in the exchange. The existence of significant differences in these types
of communication among relationship types strengthens the validity of the typology as it would
demonstrate the ability of the typology to highlight contexts where communication behaviors differ
significantly.
Nature of Social Context
The social context of an interfirm exchange is a significant factor determining the characteristics of
governance (Ouchi 1980, Granovettor 1992). We examine the variation across three aspects of the
social context highlighted as being as important: Long term orientation, Shared Relational Norms
and Relational Flexibility (Ganesan 1994, Gundlach, Achrol and Mentzer 1995, Heide and John
1992).
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Performance Management
The creation of optimal performance management mechanisms involves complex tradeoffs between
the benefits of greater control and the loss of individual initiative, improvisation and innovation
when activities are highly controlled. Process control and Outcome control are two generic strategies for
managing performance identified in the literature (Ouchi 1980, Eisenhardt 1985). The use of these
mechanisms in a task depends on the relative ease of measuring the activities involved in task
execution and the ease of measuring task outcomes. Process control is most efficient when the
steps in the execution of an activity is pre-specifiable, outcome control is most efficient when
outcomes are more easily observed than the process leading to the outcomes. We examine the
extent to which these control strategies differ across the four types.
Patterns of IT Use
Informed by the notion of exploitation and exploration as key activities in organizations (March
1991, Seely-Brown and Duguid 1991) and descriptive accounts of IT application in
interorganizational exchanges (Krcmar, Bjorn-Andersen, O’Callaghan 1995), we focus on three
patterns of information technology use. These are: IT use for basic linkage, IT use for process
integration and IT use for learning and knowledge deployment. These three patterns differ not only in their
level of complexity but also require increasing degrees of interpenetration with interorganizational
processes to produce effective outcomes (Venkatraman 1994).
Research drawing on information processing theory suggests that patterns of IT use vary across
multiple interorganizational contexts not only because of the type of information processing
capabilities required in each individual situation but also because participants have the option to use
other alternatives for uncertainty reduction (Bensaou and Venkatraman 1995). Systematic
differences in patterns of IT use between multiple types therefore provide strong evidence for
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validity of the typology. This would demonstrate the ability of the typology to identify
homogeneous regimes of IT use that result from the complex calculus involving multiple
determinants of information processing needs and the multiple sources of information processing
capabilities, among which IT use is only one of several alternatives.
Section 6: Field Study
Research Context
The distribution channel was chosen as the context for the study since the governance choice related
to interorganizational relationships is central to effective performance of both manufacturers and
retailers (Anderson and Narus 1990). The distribution channel also has a large number of
heterogeneous recurrent interorganizational relationships (Stern and Ansari 1982), making it an
attractive setting to capture variance in hybrid governance.
We collected data on the relationship between a set of independent supplier firms with one large
retailer. This choice reduces the range of extraneous variation that could confound results while
retaining variety in the interorganizational relationships included in the sample. The study was
facilitated by the cooperation of a large Canadian retailer who allowed us access to their supplier
database for the year 1994-95. While the retailer’s database lists over 3000 suppliers, over 90% of the
retailer’s total purchases in 1994 were made from a much smaller number of suppliers. We
eliminated the large number of ad-hoc suppliers from the list, those who were in the database but
were not considered 'active' for various reasons. This reduced the sampling frame to 640 suppliers.
Two senior managers at the retailer organization examined the sample of suppliers selected for this
study and confirmed that it included the retailer’s important suppliers.
The initial phase of the fieldwork consisted of attending a few one day long sessions conducted by a
large Canadian retailer with selected suppliers and conducting personal interviews of managers in
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supplier and retailer firms. We conducted hour long semi-structured interviews with 27 managers
on both sides of six retailer-supplier relationships to understand the nuances of supplier retailer
relationships which helped us design the survey instrument. Items validated in prior studies were
adapted wherever feasible and customized to the context of the survey.
The survey instrument was extensively field tested through personal administrations and mailed in
two waves to 640 suppliers, soliciting details of their relationship with the focal retailer. One week
prior to the mailing of the surveys, a senior manager at the retailer mailed a personalized letter
motivating the suppliers to respond to our survey. We called informants who did not respond
within five weeks to emphasize the importance of the survey and assure them of the confidentiality
of data provided by them.
Response Rate and Tests for Non-response Bias
Overall, 218 usable responses were received, representing a response rate of 33 percent. The
response rate is comparable to that observed in previous studies in the distribution channel (Heide
and John 1990, Ganesan 1994) but the timing of the mailing in October and November coinciding
with the peak period of supplier activity for retail sales during the Christmas season probably
precluded a higher rate of response. The possibility of non response bias was examined by
comparing responses of early respondents and late respondents and responses to the two waves of
mailing using a t test ( p<0.10) as suggested by Armstrong and Overton (1977). This revealed no
significant differences between these two groups on key constructs as well as demographics such as
the percentage of sales to the focal retailer, the number of years of association, the size of the firm
and the number of employees. In addition, call backs to 35 non respondents (5 percent of non
respondents) revealed no evidence of systematic non response bias.
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Measures
The final versions of survey items used to measure the constructs are provided in Table 8.
Objective data on supplier performance were obtained from the retailer's supplier database.
Section 7: Analysis and Results
Psychometric properties of measures
The psychometric properties of measures used to collect data from suppliers and the retailer are
found to be satisfactory. The means and standard deviations and correlations among each of the
constructs are provided in Table 6.
The levels of Cronbach’s alphas are above 0.6 for most constructs (Table 8). The alphas, in keeping
with the general convention, are measured on responses of the entire sample and indicate the
‘reliability’ of the scale. However, in a study such as this, that investigates the plausibility of different
underlying governance types, the nature of the intercorrelations between the responses for individual
questions in the subgroups of interest can vary quite widely, largely because the issues addressed in
individual items may be applicable differently among the groups.
Test 1: Orthogonality
The results of the tests for orthogonality are provided in Table 2. The results suggest that the
correlation between the formative dimensions: Process Specificity and Expertise Specificity in the
supplier data is 0.203 and significantly different from 0 (p<0.01). The formative dimensions of the
typology are significantly correlated and the typology fails the ‘strong form’ test: the requirement of
orthogonality.
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The correlation of 0.203 indicates that each dimension explains about 4 percent of the variation in
the other. A one tailed test of hypothesis to examine if the correlation coefficient is significantly less
than 0.35 suggests support for the hypothesis that r<0.35.
The formative dimensions consequently pass the ‘weak-form’ test of orthogonality in both samples,
meeting the requirement that the formative dimensions of the typology proposal be minimally
correlated.
Table 2: Results of Test of Orthogonality of Defining Characteristics (n=218)
Process Specificity: Mean, SD 5.66 (1.52)
Expertise Specificity : Mean, SD 3.05 (1.51)
Sample Correlation: rps.es (significance level for difference from 0)
0.203 (p<.01)
Strong-form test: HS: rps.es=0, Reject HS, p<0.05
Weak-form test: HW: rps.es ? 0.35, H1W: rps.es<0.35 Accept H1W, p<0.05
Derivation of Types
Four groups were created through a median split on the two formative dimensions of the typology:
process specificity and expertise specificity. These can potentially be interpreted as representing one
type of relationship that differs significantly from the other three on Processes Specificity and
Expertise Specificity.
The means of the four types and the number of observations representing the relationships in each
type are indicated in Table 3. The four types have 67, 61, 42 and 48 observations at high and low
levels of Process Specificity and Expertise Specificity.
No significant differences are observed between exchanges in the four quadrants on characteristics
such as the number of employees, the number of years of operation, the years of association with
the retailer and the number of different products supplied to the retailer. ( Table 4) The percentage
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of annual sales sold to the retailer differs between the four types. Specifically, the sales to the retailer
in Strategic Relationships comprise a higher percentage of the supplier’s annual sales than Market
exchanges.
Table 3: Four types of hybrid governance in the supplier sample (n=218)
Gp. Descriptive Label Mean, SD #Observations Process Specificity Expertise Specificity 1. Market Exchange 4.62 (1.42) 1.87 (0.82) 67 2. Expertise Dominant 5.01 (1.50) 4.14 (0.90) 61 3. Process Dominant 6.89 (0.21) 1.81 (0.71) 42 4. Strategic Relationship 6.84 (0.23) 4.40 (1.14) 48
Table 4: Demographics Characteristics of Suppliers in the Four Types of Hybrid Governance (n=218)
Variable Market Exchange
(1)
Expertise Dominant
(2)
Process Domina
nt (3)
Strategic Relationship
(4)
Overall F(p)
Scheffe Test*
% Yrly sales to retailer 13.37 20.79 19.41 24.40 3.01 (.03) (1;4) # SKUs sold to retailer 179.91 230.56 94.79 198.24 1.08 (ns) # Years of association 19.41 20.21 14.85 19.27 1.76 (ns) # Employees in firm 230 316 127 187 1.40 (ns) Product customization 3.17 4.03 2.82 4.48 10.00 (.01) (1;2,4),(3;2,4) Product complexity 3.81 4.16 3.83 4.73 5.00 (.01) (1;4), (3;4) Capital intensiveness 3.89 4.38 3.30 4.79 5.77 (.01) (3;2), (3;4)
*Note: (1;4) indicates significant pairwise differences between type1 and type4 at p<.05
In addition, suppliers in the four quadrants differ significantly in the extent of customization of the
product for the specific retailer and the complexity of the product. Suppliers in Strategic
Relationships exhibit the highest levels of both product complexity and product customization for
the focal retailer while those in the Process Dominant quadrant are the lowest on both these
dimensions. Suppliers in the Market Exchange and the Expertise Dominant quadrant, in this order,
lie between these extremes. Suppliers in the four quadrant are significantly different in the level of
capital intensiveness, those in the strategic quadrant are the highest on this dimension, followed by
those in the Expertise Dominant quadrant, the Market Exchange quadrant and the Process
Dominant quadrant.
23
Differences across quadrants on other dimensions such as the extent to which the products were
fashion oriented (rather than utilitarian) and the growth in product demand are not significant.
However, the directionality of the means suggests that the strategic quadrant comprises suppliers of
durables rather than consumables while the Market Exchange quadrant comprises exchanges that
involve products that are more consumables than durables.
Test2: Equifinality
The index of relative growth for a supplier was used as an indicator of outcomes for suppliers in the
relationship with the retailer.
To derive a performance metric valid across the wide range of products supplied, we computed an
index of growth for each supplier, relative to other firms supplying similar products. Suppliers of
similar products were grouped using information provided by each informant on the product
category that was most important for the firm in the relationship with the retailer. This is a metric
superior to sales growth as comparing the sales growth to the average sales growth of similar
suppliers enables extraneous influences on growth such as demand for product category and
increased emphasis on product category by retailer, to be factored out.
The index of relative growth was calculated as follows:
Relative Growth %= [(Supplier’s Sales Growth p1-2) /(Average. sales growth for product category in period 1-2)] *100
Purchase estimates for many product categories are made 6 to 10 months in advance of the selling
season, so in Fall 1994, suppliers were working with retailers for supplies that would be made in
Summer and Fall 1995. The data was collected from suppliers in the spring of 1995 when buyer-
supplier interactions concerned supplies to be made in late 1995 and 1996. We consequently used
performance data for purchases from suppliers in CY1994, CY1995 and CY 1996. These were used
to calculate two indices of relative growth for suppliers, one each for 94-95 and 95-96.
24
In addition, informants provided perceptual data on operational and strategic benefits from the
relationship. The average levels of supplier growth in the four groups along with the levels of
perceived benefits from the relationship are provided in Table 5 2. The hypotheses of equifinality of
performance across the four groups is tested with a one-way ANOVA that enables a statistical
decision regarding the question: ‘Can the four means be considered to belong to one sampling
distribution of means or do they belong to distinct sampling distributions?’
The results of the one way ANOVA across the multiple groups on the relative growth of suppliers
in 1995-1996 period, F(3,88)=0.9, p<0.90 highlights that the differences are not significant. The
analysis of objective data indicates that independent choices of governance types by multiple firms,
on average, lead to equally high performance in each type and suggests support for equifinality.
However, comparing the self-reported perception of firm benefits across the four groups indicates
that the four quadrants are differ significantly on both Strategic benefits F(3,213)=6.62 and
Operational benefits F(3,213)=7.57. Expertise Dominant Exchanges have significantly higher levels
of both operational and strategic benefits as compared to Market Exchanges and Process Dominant
Exchanges. Strategic Exchanges exhibit higher levels of strategic benefits as compared to Market
Exchanges but are not significantly different in perceived benefits from the other types.
2 This table is placed at the end because of its sideways format.
25
Test 3: Variations in Relationship Management Mechanisms
The means, standard deviations and correlations among the relationship management mechanisms
are presented in Table 63. The variation in the relationship management mechanisms among the four
groups is provided in Table 7.
Management Focus: Overall, the management focus in exchanges differs significantly across the
four quadrants, F(3,214)=19.72, p<.001. Recall that management focus is measured in terms of the
extent of attention paid to the exchange with the focal retailer in comparison with other retailers that
a supplier deals with. The focus on the retailer in Strategic Relationships is the highest, followed by
Expertise Dominant and Process Dominant exchanges.
Routine and non-routine communication: There are significant differences in the patterns of
routine and non-routine communication employed in the four types of hybrid governance. While
the levels of structured and routine communication across the four types are similar, F(3,214)=1.04,
p<.53, the level of unstructured communication varies significantly across the four types,
F(3,214)=5.94, p<.012. Pairwise comparisons indicate that the exchange of unstructured and rich
information is higher for Strategic Relationships and Expertise Dominant exchanges than both
Market exchanges and Process Dominant exchanges. This pattern of results suggests that a basic
level of structured communication is essential in interfirm relationships and that a basic level of
structured communication coexists with, and possibly underlies the unstructured, contextual
information exchange that occurs in strategic and expertise dominant exchanges.
Differences in the Social Context
Long Term Orientation: The levels of long term orientation in the different types are at the higher
end of the scale, varying between 4.71 and 5.42 on a 7-point scale, with an average of 5 across all
26
types. No overall differences are observed in the long term orientation (LTO) among the four
types, F(3,214)=3.21, p<.069. In addition, no two individual exchanges are significantly different on
this dimension either.
The direction of the means indicates that Process Dominant exchanges have the lowest levels of
LTO and Expertise Dominant relationships have the highest levels. The LTO in Market Exchanges
and Strategic Relationships lies in increasing order between these extremes.
Prior theory suggests that long term orientation varies linearly on the markets to hierarchy spectrum,
being low in arms-length market exchanges and high in close cooperative exchanges (Ganesan
1994). One plausible explanation for no significant differences in LTO being observed is that the
sampling in this study: the deletion of ad-hoc suppliers to the retailer from the sampling frame may
under-represent exchanges at the lower end of the spectrum of LTO. With an average of over 18
years of association (Table4), it is likely that the suppliers in the sample are all uniformly long term
oriented, and LTO ceases in this context to be a distinguishing characteristic.
Relational Norms: Overall, the level of relational norms varies significantly among the hybrid
governance types, F(3,214)=4.27, p<.01. However, pairwise comparisons reveal significant
differences are observed only between Process Dominant exchanges and Strategic Relationships.
Market Exchange, Process Dominant and Expertise Dominant types form one homogeneous
subgroup and Market Exchange, Expertise Dominant and Strategic Relationship form another.
Process Dominant exchanges have the lowest levels of relational norms. Process Dominant
exchanges, Market exchanges and Expertise Dominant exchanges are arrayed in increasing order
with Strategic Relationships having the highest levels of relational norms. This pattern is similar to
the variation on LTO.
3 Table 6, 7 are placed at the back of the paper.
27
The absolute level of the norms, even in Market Exchange, where they are the lowest among all
types is at the high end of the scale: at 4.60. This is consistent with the prior expectations in the
literature of the context of the distribution channels of longstanding exchanges, exchanges in the
sample have been continued on average for over 18 years.
Relational Flexibility: Across all four governance types, the level of relational flexibility varies
significantly F(3,214)=3.11, p<.037. However, no pair of governance types is significantly different.
Process Dominant exchanges have the lowest levels of relational flexibility, a pattern similar to that
for Relational Norms. However, Expertise Dominant exchanges have the highest levels of shared
norms, slightly higher than that for Strategic Relationships.
As expected, the three determinants of the social context: LTO, relational norms and relational
flexibility exhibit similar patterns among the four types. Expertise dominant exchanges have the
highest levels of these attributes and Expertise Dominant exchanges have the lowest levels. And
except for one significant difference (between ME and SR) in relational norms, none of the three
exhibit pairwise differences between governance types.
Taken together, the results provide support for the notion that hybrid governance occurs in highly
social contexts. The results also indicate that the level of social context does not differ among the
governance types proposed by the typology.
Patterns of IT Use
There are no significant differences in IT use for basic linkage, F(3,145)=2.31, p<.08 among the
four types, the levels of such IT use are uniformly high, between 4.01 and 5.06 on a 7 point scale.
Field interviews indicated that IT use for basic linkage between suppliers and RetCo is used typically
for electronic ordering and communication of routine messages like Advance Ship Notices (ASN)
etc. The results are therefore consistent with the observation that such IT use is emerging as an
28
industry norm in the supply chain and as the foundation for managing all interfirm exchanges (Lewis
1995).
In contrast, the use of IT for process integration between suppliers and retailers differs significantly
between types, F(3,145)=6.15, p<.001. Expertise Dominant exchanges have the highest levels of IT
use for process integration while PD exchanges have the lowest levels of such use in the sample.
Market Exchanges and Strategic Relationships display intermediate levels of IT enabled process
integration. The average levels of IT use for process integration are lower than the levels of IT use
for linkage, the overall average being 2.4 on a 7 point scale. The only pairwise difference that is
significant is between expertise dominant and process dominant exchanges.
IT use for learning and expertise leverage, like IT use for process integration, is significantly
different across all four types, F(3,141)=7.79, p<.001. In addition, two of the pairwise differences
between governance types are significant: that between Expertise Dominant exchanges and Process
Dominant exchanges and between Expertise Dominant exchanges and Market Exchanges.
Expertise Dominant exchanges have the highest levels of IT use for expertise deployment, followed
by Strategic Relationships and Market Exchanges. The average levels of this pattern of IT use are
the lowest among the three IT Use patterns: 1.95 on a 7-point scale.
The use of IT mainly for linkage, followed by IT use for process integration and finally followed by
IT use for expertise leverage is consistent with the levels of understanding of the implications and
implementation details each of these three modes of IT deployment in interorganizational
exchanges. IT use for linkage, being the most traditional use is the commonest and uniform across
all types. IT use for process design has received considerable focus as anecdotal evidence based on
success stories of companies like Walmart and P&G in streamlining their interface increase
awareness of advantages from efficient IT enabled logistics (Fuller, O’Çonor and Rawlinson 1993).
29
IT use for expertise leverage is still being evolved within firms and is an emerging trend, reflected in
the data in the lowest levels of use of all three types.
Section 8: Discussions
Moving beyond a monolithic conception of hybrid governance, we argue that hybrid governance can
be conceptualized as being of four types. In effect, we propose that the ‘swollen middle’ comprises
four mutually exclusive types of governance mechanisms that have different characteristics and are
associated with distinct patterns of behavior by participants. The results of the empirical validation
provides initial evidence from one context that the typology has merit: it meets the methodological
requirements of orthogonality, equifinality and systematic patterns variance of criterion variables
across different types.
The results of validation procedures provide interesting insights into the nature of hybrid
governance. For instance, the data suggest that there is a core set of relationship management
mechanisms: basic routine communication, outcome monitoring schemes and basic IT linkages that
are uniformly employed across all types of hybrid governance. More elaborate, resource intensive
mechanisms like process monitoring and top management involvement and focus appear to be used
selectively in different types of governance. Further, the social context variables are invariant across
governance types, confirming that hybrid governance occurs in social contexts where social and
economic linkages are interpenetrated.
A set of further analyses examining the correlation of performance to the use of relationship
management mechanisms within each quadrant appears to suggest a moderating effect of
governance type on the link between relationship management choices and performance4. The data
4 While we are not including a more elaborate description here due to limitations on document length, we enter this brief discussion
of some findings to illustrate the utility of the typology to extend our understanding of nonmarket governance.
30
suggest that enhanced performance in Strategic Relationships is associated positively with high levels
of management focus and IT Use for process integration and expertise leverage. In contrast, enhanced
performance in Market Exchanges is negatively associated with high levels of specialized
communications, and high levels of IT Use for process integration and expertise leverage. These patterns,
if supported in further investigations indicate that the four types of hybrid governance may be
viewed as gestalts requiring discriminating choices by managers to effectively manage and perform in.
The results of this study provide preliminary evidence that the four types of hybrid governance may
represent coherent sub-domains where regular patterns sought by organizational researchers are
likely to be more prominent in comparison with the noise surrounding them. For example, studies
examining the variation of phenomena like conflict resolution and integrative bargaining in the four
types and the strategic orientation of firms choosing different types of governance are other issues
that can inform both theory and practice in this important area. The typology can thus contribute to
the generation of testable hypotheses about phenomena related to hybrid governance and encourage
further theory development and testing.
31
Table 5: Performance in the Groups: Supplier Sample (n=218)
Pairwise Differences *=p<.05 Outcomes in
Exchange
Market Exchange .n=67 (1)
Expertise Dominant n=61 (2)
Process Dominant n=42 (3)
Strategic Relationship
n=48 (4)
F Stat (p value)
1,2 1,3 1,4 2,3 2,4 3,4
Relative growth, 1995-1996
-11.73 % 15.29 % 14.60 % -3.50 % F(3,88)=0.90, p<.44
Benefits (Strategic)
2.60(1.19) 3.43(1.17) 2.71(1.31) 3.33(1.33) F(3,213)=6.62 p<.001
* * *
Benefits (Operational)
2.51(1.06) 3.41(1.15) 2.61(1.22) 2.99(1.18) F(3,213)=7.57 p<.001
* *
Note: An asterisk under a,b indicates type1,type2 differ significantly in a pairwise comparison.
32
Table 6: Means and Standard Deviations of Relationship Management Mechanisms
No. Dimensions Mean (SD)
1 2 3 4 5 6 7 8 9 10
1 Management Focus 4.15 (1.67)
1
2 Non Routine Communication 4.48 (1.26) 0.21** 1
3 Routine Communication 4.55 (1.49) -0.92 0.078 1
4 Long Term Orientation 5.00 (1.43) 0.13 0.345** -0.072**
1
5 Relational Norms 4.96 (1.26) 0.172 0.429** 0.429** 0.644** 1
6 Relational Flexibility 4.61 (1.48) 0.068 0.42** -0.09 0.666** .665** 1
7 Performance Management: Outcome Monitoring
3.44 (1.60) 0.16* -.001 .065 -.083 0.022 -0.047 1
8 Performance Management: Process Monitoring
3.24 (1.47) 0.30** .163 0.032 .195** 0.236* 0.196 0.434** 1
9 IT Use (Basic Linkage) 4.63 (2.16) 0.21* .185 .
0.031 0.01 0.135 0.120 0.244** 0.218** 1
10 IT Use (Process Integration ) 2.40 (1.88) 0.325** .289 -0.041 .043 0.156 0.157 0.321** 0.362** 0.521** 1
11 IT Use (Expertise Leverage) 1.95 (1.58) 0.255** .394 -0.055 0.112 0.223** 0.258** 0.218* 0.331** 0.401** 0.76***
Note: *=p<.05, **=p<.01
33
Table 7: Variation of Relationship Management Mechanisms in the four types of Governance (n=218)
Pairwise Comparisons
Dimensions Market Exchange
(1)
Expertise Dominant
(2)
Process Dominant
(3)
Strategic Relationship
(4)
Overall Mean
F Stat, p value 1,2
1,3
1,4
2,3
2,4
3,4
Management Focus 3.08 (1.63) 4.39 (1.43) 4.31 (1.70) 5.18 (1.16) 4.15 (1.68) 19.72, p<.001 * * * *
Non-routine Communication 4.17(1.20) 4.79(1.10) 4.08(1.35) 4.87(1.26) 4.48(1.26) 5.94, p<.01 * * * *
Routine Communication 4.57(1.38) 4.29(1.33) 4.67(1.69) 4.76(1.62) 4.55(1.49) 1.04, p<.53
Long Term Orientation 4.74(1.49) 5.42(1.17) 4.71(1.75) 5.10(1.23) 5.00(1.43) 3.21, p<.069
Relational Norms 4.71 (1.06) 5.18 (1.09) 4.60 (1.63) 5.34 (1.25) 4.96 (1.27) 4.27, p<.01 *
Relational Flexibility 4.40(1.30) 4.91(1.28) 4.19(1.84) 4.89(1.51) 4.61(1.48) 3.11, p<.037
Performance Management: Outcome Monitoring
3.39 (1.14) 3.56 (1.21) 3.18 (1.22) 3.59 (1.06) 3.44 (1.16) 1.24, p<0.29, ns
Performance Management: Process Monitoring
2.98 (1.39) 3.60 (1.47) 2.54 (1.28) 3.78 (1.46) 3.24 (1.47) 7.92, p<.001 * * *
IT Use (Basic Linkage) 4.01(2.19) 5.06(1.89) 4.98(2.09) 4.85((2.30) 4.63(2.16) 2.31, p<.08, ns
IT Use (Process Integration ) 1.88 (1.61) 3.29 (1.55) 1.75 (1.92) 2.84 (2.09) 2.40 (1.88) 6.15, p<.001 *
IT Use (Expertise Leverage) 1.44(1.31) 2.82(1.58) 1.42(1.16) 2.29(1.86) 1.95(1.58) 7.79, p<.001 * *
Note: * : significant difference at p<.05) in a pairwise comparison.
34
Table 8: Details of Constructs and Measures
Process Specificity, Cronbach’s ? =0.70 Please indicate the extent to which the resources you have deployed (assets, people,infrastructure etc.) when working with this supplier are relatively similar or are significantly different from what you use with other retailers. Please select N/A when a specific resource is Not Applicable in your relationship with this supplier.
Software and applications (e.g. billing, inventory management, EDI etc.): Administrative procedures created to work with this supplier are:
Scale: (N/A, Relatively Similar as with other Retailers--Moderately Customized--Significantly Customized for RetCo, 7 point Scale*) Source: adapted from Masten ,Meehan and Snyder 1991, Zaheer and Venkatraman ‘94 Expertise Specificity, Cronbach’s I=0.85
Please indicate the extent to which the Expertise deployed by you in the following activities is significantly specific to the supplier relationship (i.e. customized for this supplier) or is relatively similar to what you use with other suppliers. For activities not pertinent to your exchange with supplier, please select N/A.
Planning for new products, programs Product conception and design Establishing product pricing
(N/A, Relatively Similar as with other suppliers--Moderately Customized--Significantly Customized for this supplier, 7 point Scale*) Management Focus, Cronbach’s ? =0.73 Please indicate the extent to which the resources you have deployed (assets, people,infrastructure etc.) when working with this retailer are relatively similar or are significantly different from what you use with other retailers. Please select N/A when a specific resource is Not Applicable in your relationship with this supplier.
Lead Times for supplying the product to RetCo are: The nature of information your firm shares with RetCo is: The level of management time and attention devoted to this relationship: (N/A, Relatively Similar as with other Retailers--Moderately Customized--Significantly Customized for RetCo, 7 point Scale*) Source: adapted from Masten ,Meehan and Snyder 1991, Zaheer and Venkatraman ‘94
35
Construct Measures and Response Formats Market Concentration
Please estimate the total market share in Canada of the top 3 retailers in this product category: # Direct competitors (eg. large retailers) supplying similar products to major retailers in the Canadian market Adapted from Bensaou and Venkatraman 1995
Product Characteristics
Please indicate the position on the following scale that best describes the product category: 3 items, 7 point Semantic Differential
Source Standard (low customization for RetCo Specialized (highly customized for RetCo) Simple Complex Fashion oriented and style driven Utility oriented, not style driven Adapted from Bensaou and Venkatraman 1995
Relationship Benefits
Please indicate the extent to which you are receiving the following benefits as a result of your relationship with this supplier: Strategic Benefits: (Cronbach’s I=0.83) Learning about customers and markets for our products Creation of new products, product enhancements Development of new business opportunities Operational Benefits: (Cronbach’s I=0.75) Cost efficiencies from high sales volumes Improvements to current processes or creation of new business processes Increased profitability (Little or none of this benefit...Some level of benefit...High level of this benefit, 7 point scale)
Communication Please indicate your level of agreement or disagreement with the following statements describing the management of your relationship with this retailer: Non-routine Communication, Cronbach’s I=0.72 We regularly provide general information to this supplier (e.g. market trends, technology developments, industry forecasts etc.). We routinely provide sensitive information about RetCo’ plans and long term strategies to this supplier Our information sharing with this supplier goes far beyond the minimum required by formal agreements There is broad based contact between our firm and this supplier’s personnel across multiple levels
Routine Communication, Cronbach’s I=0.62
Our communication is largely channeled through our account rep.
Communications with RetCo are largely about commercial and administrative issues (e.g. prices, delivery, schedules etc.)
(Strongly Agree..Neither Agree nor Disagree..Strongly Disagree, 7 point scale)
36
Long Term Orientation, Cronbach’s I=0.75 Please indicate your level of agreement or disagreement with the following statements describing the management of your relationship with this retailer: We believe that over the long run, our relationship with RetCo will be profitable. Our long term goals and those of this supplier complement each other
Adapted from Ganesan (1994) Relational Norms, Cronbach’s I=0.61 Please indicate your level of agreement or disagreement with the following statements describing the management of your relationship with this retailer: Our relationship with RetCo is based on mutual benefits and trust Our relationship extends across many complex responsibilities and multiple tasks RetCo and our firm have supported each other through adverse and challenging situations Adapted from Gundlach, Achrol and Mentzer (1995) Relational Flexibility, Cronbach’s I=0.61 Please indicate your level of agreement or disagreement with the following statements describing the management of your relationship with this retailer: Flexibility in response to requests for changes is characteristic of our relationship Our firms and RetCo expect to be able to make adjustments in the ongoing relationship to cope with changing circumstances Our relationship is flexible in accommodating one another is special problems and needs arise Adapted Heide and John (1992) (Strongly Agree..Neither Agree nor Disagree..Strongly Disagree, 7 point scale) Performance Monitoring To what extent are the following actions used by RetCo in the relationship: Process Control, Cronbach ‘s alpha =0.67 Evaluating performance against suppliers considered best-in-class Quality audit of processes Random product testing Outcome Control, Cronbach ‘s alpha =0.52 Offering performance based incentives Evaluating performance against contract terms Imposing penalties on non-compliance with agreement
37
IT Use Please indicate the extent to which you use IT based support for the following in your relationship Basic Linkage (Cronbach’s I=0.92)
Order processing, invoicing and settling accounts
Exchange of shipment and delivery information with RetCo
Process Integration (Cronbach’s I=0.73)
Integration of production planning and forecasting with retailer’s processes for
monitoring of warehouse stock and retail sales .
Enabling coordinated responses to unexpected disruptions or events with RetCo
Learning, Knowledge leverage (Cronbach’s I=0.84)
Leveraging your firm’s expertise to create new business opportunities
Understanding trends in sales and customer preferences with RetCo
Integrating your functions (e.g. designs and manufacturing) with RetCo’ service organization
(N/A, Minimal IT Support...Some IT Support....Significant IT Support, 7 point scale) Adapted from Sethi and King (1994)
38
Appendix –1
Intangible Asset Specificities in Interfirm Relationships Process Specificity: We define process specificity as the degree to which critical processes of one firm are
specific to the requirements of the other firm in a vertical interorganizational exchange. Specialized processes are
routines and operating procedures specifically devised to enable action in particular situations
encountered in an exchange. Instances include context specific processes for new product
introduction, customer service, inventory movement, and quality control. Specialized routines or
standard operating procedures (Nelson and Winter 1982) evolve over time in organizations through
the codification and institutionalization of successful patterns derived from repeated execution of
activities (March 1991).
The use of information technologies in mediating interfirm interactions often leads to the
establishment of customized business processes that are often specific to the specific relationship.
These specialized routines created to enact a particular inter-organizational exchange generally have
little value outside the focal relationship. For instance, specialized production and manufacturing
processes created by component manufacturers in the automobile industry to implement Just-in-
Time (JIT) deliveries for specific customers need to be completely redesigned if manufacturers
desire to make JIT deliveries to another automobile assembler (Klier 1993). In creating JIT delivery
of products to automobile assemblers (for instance Ford or Toyota), suppliers make significant
changes to their own materials procurement, manufacturing scheduling and logistics processes.
These changes are designed to provide manufacturers the capability to deliver precise lot sizes
(determined by the automaker’s production plan) at very short and precise intervals before the
components are required on the assembly line. JIT supply generates significant cost savings by
eliminating the costs of carrying and managing component inventories throughout the system, and is
achieved by the manufacturer customizing a wide range of firm processes for the specific auto
39
manufacturer (Klier 1993). Clearly, the intangible investments made by JIT suppliers are highly
specialized to suit specific customers, are of limited value in other exchanges and reflect high levels
of process specificity. Similarly, the creation of administrative procedures by insurance agents that
are specific to focal insurance carriers in the insurance industry is another example of customization
that leads to process specificity (Zaheer and Venkatraman 1994). A summary of selected attributes
of process specificity are provided in Table 9.
We expect higher levels of process specificity to be positively related to the level of hybrid
governance as higher levels of hybrid governance enable more efficient coordination of process
execution and superior delivery of value, thus safeguarding intangible firm investments in specialized
processes. For instance, in the context of a supplier-retailer relationship, a high level of linking of
processes, termed quasi integration (Zaheer and Venkatraman 1994) enables the supplier firm to focus
on the specific exchange and understand their role in enabling the retailer’s organization to create
value. Such an understanding would allow the supplier to explore avenues for fine tuning their
specialized process for supplying the retailer, eliminating redundant steps or adding activities that
serve to improve the overall efficiency of process execution to the advantage of both parties. This
therefore makes it more likely that the supplier-retailer relationship would be continued in future
time periods, effectively protecting the retailer-specific investments in creating specialized processes.
In addition, the higher the level of process specificity, the higher is the extent of supplier interest in
participating in joint decision making as this allows the supplier to influence retailer decisions in a
manner that are favorable to the supplier (Heide and John 1990): thereby protecting specialized
intangible investments.
Table 9: Attributes of Process and Expertise Specificity
Attributes Process Specificity Expertise Specificity Constituent character Creation of rules, standard operating Action, Issue diagnoses based on
40
procedures applicable in specific situations encountered in the exchange to achieve predetermined outputs
experience, judgement and insight into phenomena particular to the exchange. Mental models evolved through interactions of individuals in exchange
Deployment Appropriate response selected from set of permissible options
Appropriate response formulated in context of action
Judgements Local judgment about appropriateness of routine, standard operating procedure elaborated in context
Global judgement e.g., how should such a problem be solved, what is the relevant information, what kinds of solutions are appropriate
Embodiment Codified procedures, formal and informal codification of cumulative experience, formal procedure manuals, informal checklists
Associated with experts, old hands
Cause-effect relationships
Explicit and applicable to the unique context of the exchange.
Tacit and based on uniqueness of context.
Example
Expertise Specificity. We define expertise specificity as the degree to which a firm’s critical areas of
expertise are specific to the requirements of the particular firm in the interorganizational exchange. Organizational
expertise, an organizational level construct, is analogous to expertise at the individual level and refers
to an organization’s ability to access and deploy an extensive body of prior knowledge to (Nonaka
1994, von Hippel 1994). Important domains of organizational expertise that could be specific to a
particular relationship include those related to competitive analysis, strategy formulation and new
product conception. Specialized expertise is created through social processes that encourage the
validation, refinement and enrichment of knowledge in the context of action (Nonaka 1994). Prior
research in a variety of contexts suggests that specialized knowledge tends to be domain specific
with imperfect transferability across contexts (Shanteau 1992).
At the organizational level, the customization of expertise occurs through the application of
organizational resources to understanding of patterns and rules in a specific context. As expertise
deployment progressively leads to increasingly effective issue diagnosis and problem solving based
on greater levels of familiarity and understanding of nuances of a particular exchange, these
investments are limited in their application to other contexts. Prior to the abstraction of general
41
principles from the sequence of cause and effect in the specific context, the knowledge, though
generally applicable is specific to the relationship and less applicable elsewhere.
Expertise specificity also is traceable to social factors unique to the context in the course of action in
the exchange. The development and refinement of knowledge in a specific social context leads to
the creation of expertise that is sticky and less amenable to application and transfer to other contexts
(von Hippel 1994). This is often manifested in context-specific discriminating judgment about
particular events that are deemed meaningful and need attention to while others are considered
irrelevant and ignored (Weick 1985). These judgments occurring in a socially defined context are
often distributed among multiple members involved in action (Weick and Roberts 1993). In
particular, when performance involves processes crossing organizational boundaries as in supplier-
retailer relationships, the constituent expertise is distributed among multiple individuals in the firms
involved. In such instances, an understanding of the coordination mechanisms that enable the
application and deployment of expertise is particular to the context as well. Because the expertise of
each firm in such instances is complementary to that of the other firm, the expertise as a whole is
sited in the specific context and only partially redeployable by either firm.
In practice, expertise specificity arises in interfirm contexts both from the uniqueness of the
expertise as well as the distribution of the expertise among personnel of interacting firms. For
instance, our field studies revealed that a Canadian swimwear manufacturer’s focus and interaction
with the personnel of one particular retailer has led them to progressively develop a keen
understanding of the fashion preferences of the specific demographic segment addressed by the
retailer. This forms the foundation of the swimwear manufacturer’s capability to create innovative
designs targeted specifically to the focal retailer’s customers’ evolving needs for fashionable
swimwear. However, this manufacturer’s expertise and depth of knowledge of the specific retailer’s
42
customers has limited applicability in supplying other competing retailers who are positioned
differently from the focal retailer and address different market segments. This is consistent with
research that has documented the limited transferability of specialized expertise across multiple
domains in other contexts (Shanteau 1992). The manufacturer also indicated that their expertise was
less useful in working with other retailers where the buyers' signals of fashion direction and
expectations of how the swimwear line would complement their lines of related accessories (wraps,
beach towels, bags etc.) differed from those of the focal retailer.
Our field observations support the explanations offered by Venkatraman and Christiaanse (1996)
who describe how American Airlines (AA) combined a decision support system using data from the
SABRE reservation system with individual travel agents’ understanding of their markets to benefit
both parties. They found that the agents' understanding of their own customer and market needs
combined with the information provided by AA's salesforce enabled both parties to significantly
enhance their market shares of traffic between specific city-pairs. This is an instance where the
parties (AA sales agent and travel agent) each developed specific expertise that is only partially
redeployable in other exchanges.
Consistent with TCE, we expect higher levels of expertise specificity in an exchange are likely to be
associated with a move away from arms length interactions towards higher levels of hybrid
governance. We argue that hybrid governance provides the mechanisms to not only protect
investments in intangible assets but also simultaneously aiding the deployment of specialized
expertise. Higher levels of quasi integration (QI) are credible commitments that create the context
where cooperative interorganizational action is valued normatively (Anderson and Weitz 1992). The
higher level of attention paid to the relationship by the supplier accompanying a high level of QI
allows the effective deployment of context-specific knowledge, enabling the firm create higher levels
43
of value with the expertise than would be possible with a lower level of QI. This has the effect of
enhancing the value delivered in the exchange, and consequently extending the shadow of the future
on the relationships (Heidi and Miner 1992) and we suggest that this effectively safeguards
investments in relationship specific expertise in a manner that economizes on transaction costs.
Further, participation in joint decision making where participants pool information (Heidi and John
1990) allows suppliers to influence decisions in ways that are favorable to their interests. Further,
this lets suppliers identify opportunities to improve the deployment of their expertise in the
exchange. The enhancement in value delivery as a result of this participation in decision making
increases the likelihood that the exchange is continued in future periods. This casting of the shadow of
the future on the relationship enables a firm to effectively safeguard investments in customized
expertise that diminish in value if the exchange is discontinued. Overall, these arguments, both from
the perspective of safeguarding specialized assets, and of enhancement of value delivered in the
exchange suggest that higher levels of expertise specificity, ceteris paribus, are likely to be related to
higher levels of hybrid governance.
44
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