A Typology of Hybrid Governance: Proposal and Empirical Validation

Mani R. Subramani, msubramani@csom.umn.edu

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, jhenders@bu.edu

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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