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Attachments Reverse Logistics Superior and Performance ImplicationsDid Daugherty, Richey, Genchev & Chen (2005) find any significant relationship between resource commitment to reverse logistics programs and economic or service quality-related performance?How did they come to their conclusion that resource commitment must be focused and that they should be targeted to information technology capabilities?What was a limitation of this study and why did Daugherty, et.al. (2005) consider that particular issue to be a limitation? Explain. 2 Questions on attachment Week 5 written assignment
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Alok Kumar, Jan B. Heide, & Kenneth H. Wathne
Performance Implications of
Mismatched Governance Regimes
Across External and Internal
Relationships
This article examines how a manufacturer’s governance of an external supplier relationship affects its performance
toward a downstream retail customer. In line with sociological and economic theory, a manufacturer’s reliance on
supplier norms and incentives, respectively, promotes performance. However, the performance effect of each
external governance mechanism weakens in the presence of a different governance regime within the
manufacturer firm itself. Specifically, internal incentives weaken the effect of external norms, and internal norms
weaken the effect of external incentives. From a practical standpoint, these findings point to the difficulty of
managing sets of relationships that involve different parties and mechanisms. From a theoretical standpoint, they
point to the complex interplay between social norms and economic incentives in driving performance outcomes.
Keywords: governance, interfirm relationships, formal relationships, informal relationships, incompatible governance
mechanisms, performance
A
According to extant theory, norms and incentives are
ideal types of governance mechanisms (Bradach and Eccles
1989; Ouchi 1980), and both are capable in principle of
promoting performance. However, although much has been
learned about governance in recent years, most of the current knowledge is based on the observed effects of particular mechanisms within the context of individual relationships. Although such a focus is consistent with extant
theory, which emphasizes the “transaction” as the unit of
analysis (Commons 1934; Williamson 1996), marketing
exchanges frequently involve multiple relationships that are
connected in various ways (Hutt, Reingen, and Ronchetto
1988; Palmatier, Scheer, and Steenkamp 2007).
In this article, our goal is to extend the existing literature on relationship governance in two ways. First, we consider the possibility that a manufacturer’s governance
efforts toward an upstream supplier have performance
implications in a downstream customer relationship.
Specifically, the stronger the norms or incentives in the
focal supplier relationship, the closer is the upstream coordination, and the greater is the manufacturer’s ability to
respond to downstream market conditions. From a practical
standpoint, this suggests that a firm’s dyadic relationshipbuilding efforts are associated with economies that go
beyond the dyad in question.
Second, we explore whether these performance effects
depend on how functional areas and relationships within the
manufacturer firm itself are governed. Importantly, the processes and workflows that constitute a manufacturer’s relationship with an external supplier (e.g., product design,
delivery) also involve departments and relationships within
the firm itself (e.g., merchandising, product design, sales).
manufacturer’s relationships with its supply chain
partners are important for its overall strategy. For
example, relationships with upstream suppliers may
contribute significantly to a firm’s marketing initiatives
toward downstream customers. However, industry observation suggests that high-performing supply chain relationships do not emerge on their own (Narayanan and Raman
2004). Rather, they require some form of a “visible hand”
(Smith 1776), or explicit governance efforts to reduce the
friction inherent in interactions between self-interested parties (Williamson 2005).
Prior research has shown the different ways a visible
hand can be deployed. For example, research grounded in
sociological theory and contract law has focused on the use
of informal social norms (e.g., Heide and John 1992;
Noordewier, John, and Nevin 1990). Other lines of research
have built on the rational choice tradition from economics
to consider the use of formal incentives of various kinds
(e.g., Bergen, Dutta, and Walker 1992; Lal and Staelin
1986).
Alok Kumar is Assistant Professor of Marketing, Smeal College of Business, Pennsylvania State University (e-mail: auk25@psu.edu). Jan B.
Heide is Irwin Maier Chair in Marketing, School of Business, University of
Wisconsin–Madison; Professorial Fellow, Department of Marketing and
Management, University of Melbourne; and Senior Research Associate,
Judge Business School, University of Cambridge (e-mail: jheide@bus.
wisc.edu). Kenneth H. Wathne is BGF Chair and Professor of Marketing,
Norwegian School of Management and Adjunct Professor, School of Business, University of Stavanger(e-mail: Kenneth.wathne@bi.no). The authors
are listed in random order; they all contributed equally. The authors thank
the three anonymous JM reviewers and Kersi Antia for their helpful comments on the article.
© 2011, American Marketing Association
ISSN: 0022-2429 (print), 1547-7185 (electronic)
1
Journal of Marketing
Vol. 75 (March 2011), 1–17
These internal relationships and the relevant boundary personnel are also subject to governance mechanisms, such as
norms and incentives. However, a firm’s internal governance arrangements do not necessarily mirror its external
ones (Bacharach, Bamberger, and Sonnenstuhl 1996). This
raises the question of what happens when supply chain
workflows are subject to different governance regimes
across external and internal relationships.
We posit that a different governance regime within the
manufacturer firm itself weakens the performance effects
that follow from the use of norms and incentives toward an
upstream supplier. This is because individual governance
mechanisms possess different interaction logics or decisionmaking properties (Heide and Wathne 2006; Messick
1999), and when different mechanisms are combined across
relationships, the resultant governance mismatches cause
performance losses.
We test our hypotheses with an empirical study in the
apparel industry. From a theoretical standpoint, our findings
reveal sources of friction between some commonly studied
governance mechanisms, and they inform the ongoing
research agenda on the interaction between social norms
and economic incentives (Granovetter 2005; Kreps 1997).
From a practical standpoint, we derive guidelines for relationship management that acknowledge both (1) how performance follows from the use of individual governance
mechanisms within a particular relationship and (2) how
governance mismatches across relationships weaken these
effects. In general, our findings suggest that limiting the
focus of a firm’s governance decisions to individual mechanisms and relationships is potentially misleading.
We organize the article as follows: In the next section,
we present the theoretical framework and research hypotheses. Then, we describe the research method used to test the
hypotheses and the empirical results. Finally, we discuss the
study’s implications and offer topics for further research.
Theoretical Framework
Figure 1 shows the relationships among a manufacturer
(e.g., Perry Ellis), an upstream supplier (e.g., Imago), and a
downstream retail customer (e.g., Macy’s). We focus on the
FIGURE 1
Conceptual Framework
Supplier
Manufacturer
Retail Customer
Supplier Decisions
Manufacturer Decisions
Manufacturer Operational
Performance
2 / Journal of Marketing, March 2011
manufacturer’s operational performance in relation to the
downstream retailer, as reflected in a range of service outputs, such as delivery quality, cycle time, and order accuracy (Bucklin 1966). As Figure 1 shows, a manufacturer’s
performance toward a retail customer is the outcome of a
series of generic workflows (e.g., product design, manufacturing, sales, delivery) that involve both (1) the upstream
supplier and (2) different functional areas and boundary
personnel within the manufacturer firm itself (e.g., in purchasing, merchandising, and sales).
Although a supply chain is a unique competitive unit or
an “organized behavior system” (Alderson 1957), the goals
of the parties that constitute the system, whether they are
external or internal to a particular firm, are not necessarily
aligned on a consistent basis. Transaction cost theory (e.g.,
Williamson 2005) suggests that interactions between
exchange partners may involve opportunism. This requires
the use of so-called governance mechanisms toward the
focal parties, whose purpose is to influence their ongoing
decision making and ensure that the overall workflow delivers performance in relation to the end customer.
Drawing on different academic disciplines, prior
research has identified the different forms of governance
mechanisms. For example, research grounded in sociological theory and contract law has emphasized the role of
informal arrangements and relational contracts based on
social norms. In contrast, economic theory, in particular its
“rational choice” branch (Becker 1976), has emphasized the
role of formal incentives. We consider how manufacturers
can use each mechanism in their supplier relationships to
enhance performance. Next, we consider how the presence
of an incompatible governance regime within the manufacturer firm itself weakens these effects.
Manufacturer–Supplier Relationship: First-Order
Effects
Research in sociology (e.g., Granovetter 2005; Uzzi 1997)
describes a “homo sociologicus” whose behavior is “pushed
from behind” by informal rules or social norms. Similarly,
research on contract law (e.g., Macneil 1980) shows how
decisions, even between business partners, are influenced
by implicit expectations of various kinds. For example,
interfirm relationships frequently involve solidarity norms,
defined as bilateral expectations that a high value is placed
on the relationship itself (Heide and John 1992). The focal
point for such norms is the relationship as a whole—that is,
a single maximizing unit (Macneil 1980) with shared roles.
In a supply chain context (see Figure 1), the decisions
subjected to solidarity norms include product design, quality, and delivery. For example, consider a situation in which
market conditions require adaptations to the supplier’s
delivery schedule. Solidarity norms promote performance in
such situations because their informal quality induces cooperation even when the terms of exchange between the parties are incomplete. Adjustments are made without elaborate documentation of individual roles and tasks, and
explicit cost–benefit linkages need not be established for
each activity ex ante because the parties agree to tolerate,
within reason, short-term inequities in the interest of the
relationship as a whole.
Uzzi’s (1997, p. 51) qualitative study provides examples
of how established norms enable apparel suppliers and
manufacturers to quickly reach mutual understandings and
make decisions because, as one informant noted, “we are all
in the same boat.” In general, the stronger the solidarity
norms between a manufacturer and a supplier, the more
closely aligned are the relevant goals, and the higher is the
likelihood that the supplier’s ongoing decision making will
promote manufacturer performance. Thus:
H1: The stronger the solidarity norms in the (upstream) supplier relationship, the greater is the manufacturer’s (downstream) performance.
In contrast with the sociological perspective on governance, economic theories of relationships, such as transaction cost and agency theory, embrace the assumption of a
self-interested “homo economicus” whose decisions are
“pulled from the front” by cost–benefit calculations of their
likely consequences. In turn, this assumption has led to an
emphasis on formal governance mechanisms, such as economic incentives.
A manufacturer can create supplier incentives by paying
a price premium for the focal product. A price premium
refers to a price that exceeds the marginal costs or, equivalently, the competitive market price for a particular quality
level (Klein and Leffler 1981). The effect of paying a price
premium is to create a self-enforcing “contract” tied to the
value of future transactions (Rao and Monroe 1996). When
such a contract is in place, cooperative supplier actions
ensure a continued revenue stream, and opportunistic
actions, to the extent that they cause relationship termination, produce a revenue loss.
Importantly, incentives promote supplier support for the
relationship depending on their formal and explicit quality.
In contrast with the incomplete contracting logic of a solidarity norm, an incentive regime requires that the parties
clearly specify individual roles, tasks, and performance levels (e.g., with regard to product specifications and delivery
schedule) as a basis for administering the incentives in
question.
The greater the incentives the manufacturer makes
available to the supplier, the greater is the likelihood that
the supplier’s decisions support the manufacturer’s strategy.
When market conditions necessitate supplier cooperation,
as we described previously, the possibility of price premiums tied to future sales increases the likelihood that the
supplier will perform the necessary activities and that the
manufacturer’s downstream performance will be enhanced.
Thus:
H2: The greater the incentives in the (upstream) supplier relationship, the greater is the manufacturer’s (downstream)
performance.
Hereinafter, we refer to the performance implications of
the individual governance mechanisms expressed in H1 and
H2 as first-order effects. Figure 2 graphically illustrates the
hypotheses. Importantly, although these hypotheses involve
individual governance mechanisms, they also involve complex, multilevel processes. Specifically, they build on previous research (Wuyts et al. 2004) to suggest that a firm’s
efforts to organize a particular (upstream) relationship could
have spillover effects in a different one (i.e., in a downstream customer relationship).
In the next section, we discuss how these effects weaken
when the focal mechanisms coexist with a different governance regime within the manufacturer firm itself. We refer
to such scenarios as second-order effects (see Figure 2).
Constellations of External and Internal
Governance Mechanisms: Second-Order Effects
The focus of a manufacturer’s upstream governance efforts
is on a supplier’s decisions. Although these efforts can
influence manufacturer performance, the external supplier’s
decisions represent only a part of the overall input. According to Choi, Dooley, and Rungtusanatham (2001), a defining feature of extended supply chains is the need to manage
larger workflows that involve multiple firms and parties,
including different functional areas and boundary personnel
within a manufacturing firm (e.g., merchandising and
sales).
Importantly, the relevant decision makers within the
manufacturer firm are also subject to governance regimes
(Anderson and Gatignon 2005). Indeed, research (e.g.,
Stinchcombe 1985) has shown that norms and incentives
are generic governance devices that apply both across and
within organizational boundaries. For example, research in
various disciplines (e.g., Ayers, Dahlstrom, and Skinner
1997; Baker, Gibbons, and Murphy 2002; Blau and Scott
1962; Lindenberg 2001) has shown that informal solidarity
norms, defined as expectations about joint responsibilities
across functional areas, are common within firms. Furthermore, parallel to the supplier relationship, boundary personnel within the firm may be subject to incentive regimes of
various kinds (Lal and Staelin 1986; Mishra, Heide, and
Cort 1998). For example, apparel companies frequently tie
explicit and formal financial rewards (e.g., salary increases,
bonuses) to departmental managers’ ability to manage
downstream retailer relationships.
FIGURE 2
Research Hypotheses
Supplier
Solidarity
Norms
H1 (+)
Manufacturer
Operational
Performance
H2 (+)
Supplier
Incentives
H3 (–)
Manufacturer
Internal Incentives
H4 (–)
Manufacturer
Solidarity Norms
Main effects (H1 and H2) are first-order effects.
Interactions (H3 and H4) are second-order effects.
Performance Implications of Mismatched Governance Regimes / 3
Although a firm can use norms and incentives both externally and internally, its internal governance arrangements
do not necessarily mirror its external ones. Both the supply
chain literature (e.g., Charan 2006; Hemp and Stewart
2004) and organization theory (e.g., Bacharach, Bamberger,
and Sonnenstuhl 1996; McGinn and Keros 2002) show that
governance regimes across organizational boundaries frequently differ. This raises the question whether different
governance mechanisms, when brought to bear on the same
basic processes or workflows, affect overall manufacturer
performance.
Note that different governance mechanisms are associated
with unique (social vs. economic) interaction logics. These
logics differ in their (1) focal point (the overall relationship
vs. the individual parties), (2) time dimension (long vs. short
term), and (3) decision-making process (informal vs. formal
rules). Heide and Wathne (2006) argue that governance
mechanisms are capable of inducing different generic relationship roles, which, when internalized, exert systematic
influence on a party’s decision making.
In general, decision making across a value chain is
facilitated by the extent to which the different parties (e.g.,
the manufacturer’s employees) operate within a single governance regime or employ the same decision logic. However, to the extent that the relevant parties are subject to different governance regimes and are forced to switch between
them, this creates a governance mismatch that weakens the
effect of the individual mechanisms and thus reduces overall performance.
Heide and Wathne (2006) explain switching across governance regimes in terms of the “stickiness” associated with
particular roles. We propose that stickiness resides in the
unique properties of norms and incentives, which produce
coordination difficulties when the two intersect as part of a
larger workflow. As a specific example, assume that the
upstream supplier relationship is based on solidarity norms
and that the internal relationships are governed through
incentives. Furthermore, consider a situation in which market conditions require a change in product design or delivery schedule. Acting under a prevailing solidarity norm, the
upstream supplier, when working with its counterpart in the
manufacturer’s purchasing department, will make the necessary changes to its processes without insisting on a complete specification of individual tasks and rewards. When
the cost–benefit implications of specific activities are not
clear, the supplier will, within reason, “satisfice rather than
maximize on price” (Uzzi 1997, p. 37). Thus, while the solidarity norm’s informal quality promotes performance,
aspects of the overall workflow remain incomplete and
undocumented.
However, assume that internal stakeholders within the
manufacturing firm (e.g., the sales department) receive
financial incentives that are affected by the supplier’s
actions. To safeguard their individual incentives against
supplier nonperformance, these stakeholders will demand
that the informal dealings with the supplier be formally
codified and translated into individual tasks and performance levels as a prerequisite for an appropriate compensation process. Conceptually, the particular interaction logic
that underlies incentives (e.g., Klein and Leffler 1981; Mes-
4 / Journal of Marketing, March 2011
sick 1999) requires that such codification takes place. The
necessary process, however, is time consuming, costly, and
subject to both direct errors and omissions that compromise
performance to the downstream customer.1
In principle, if the manufacturer’s other departments are
subject to the same type of governance regime (i.e., solidarity norms), the larger workflow will not be subject to obstacles, and the upstr …
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