Abstract Introduction Opportunism

THE COMPLEMENTARY NATURE OF QUALIFICATION AND MONITORING —SAFEGUARDING MARKETING CHANNELS Lise Feirud, Simon J. Bell, Robert E. Widing, Jan B. Heide

Abstract This research investigates marketing channels and key safeguarding mechanisms used to minimise or prevent opportunistic behaviour by partner organisations. To date, researchers have considered qualification and monitoring as substitutes—the presence of one safeguarding mechanism reduces the need for the other. In addition to this, we consider the complementary nature of safeguards, where capable performance in one can provide a basis for superior performance in another. In other words, the combination of qualification and monitoring may result in greater exchange performance than either safeguard individually. The objective of this research is to develop a dynamic safeguarding capability using qualification and monitoring as complementary safeguarding mechanisms to minimise opportunistic behaviour and enhance relationship performance. We also look at the moderating effect of organisational memory.

Introduction Transaction cost theory suggests that channel partners will possibly act opportunistically, given the chance (Stump and Heide 1996), as long as such behaviour is feasible and profitable (John 1984). This kind of behaviour increases gains in the short-term for the party acting opportunistically, but may also affect both parties long-term profits, costs and market opportunities. Hence, the management of opportunistic behaviour plays a critical role in both channel performance and channel member satisfaction (Gassenheimer, Baucus and Baucus 1996). Control mechanisms such as ex ante qualification and ex post monitoring, protect the firm from poor performance and opportunistic behaviour by channel partners. Safeguarding research to date has been notably static in nature. Our study, exploring the complementary nature of safeguarding mechanisms over time, introduces a mere dynamic perspective of channel governance.

Opportunism When a manufacturer uses a distribution network to sell and service their products, they expose their brand equity to opportunistic behaviour (Williamson 1996). Opportunism is described as “a lack of candor or honesty in transaction, to include self-interest seeking with guile” (Williamson 1975, p. 6). This strong form, or blatant opportunism, is manifested in the form of misrepresentation ex ante, and violations ex post. Examples of blatant opportunism include lying about skills and resources, incomplete disclosure of information, cheating and distortion of information. Resent research by Wathne and Heide (2000) expand on the notion of blatant opportunism, and identify two general categories of opportunism, namely, active and passive opportunism that may occur in an ongoing relationship. The channel partner can breach a formal or informal agreement by either engaging in actions that harm the relationship or refraining from fulfilling the agreement or undertaking certain actions. If the distributor is selling the

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manufacturer’s brand in an unauthorised territory or violates contractual exclusivity, the distributor actively breaches the agreement. Channel partners can passively fail to deliver through withholding sales effort and/or support efforts of the manufacturer’s brand (Wathne and Heide 2000).

Safeguarding channel relationships Due to information asymmetry in interfirm relationships it is possible for channel partners to act opportunistically without being detected. Williamson (1985, pp. 56-57) notes, “governance structures differ in their capacities to respond effectively to disturbances (i.e., opportunism).” Jap and Ganesan (2000, p. 228) suggest “the deployment of appropriate control mechanisms to inhibit opportunistic behaviour or induce behaviours that promote the continuance of a relationship.” Examples of such behaviours are reseller compliance and adaptation, and relational norms. Research to date has mainly focused on individual control mechanisms (Anderson and Weitz 1992, 1992, Heide and John 1990, Lal 1990, Lusch and Brown 1996) and their interdependencies (Stump and Heide 1996). Research in marketing channels recognises that multiple control mechanisms can be applied for governing relationships. Several researchers (Anderson 1988, Brown, Dev and Lee 2000, Jap and Ganesan 2000, John 1984) have previously examined and support the view of simultaneous application of control mechanisms. Stump and Heide (1996) find that when qualification of channel partner ability is applied, the monitoring efforts of the partner also increase. In addition, research indicates that the appropriateness and identification of criteria to be used in selection and monitoring is essential for safeguarding efficiency (Wathne and Heide 2000). The researchers suggest that selection criteria should be identified during the qualification process that, if misrepresented or contradicted, enables efficient monitoring. Based on this we propose a new perspective, which considers the complementary nature of safeguards. This perspective holds that capable performance in one (eg. qualification) can provide a basis for superior performance of another (eg. monitoring). For example, attributes developed/identified in the process of qualifying potential channel partners provide a baseline for subsequent monitoring efforts.

Dynamic safeguarding capability The qualification and monitoring mechanisms conceptualised in the marketing literature are notably static in nature. Challenges with the effectiveness of qualification and monitoring are 1) identification of appropriate criteria, 2) continuous adaptation of criteria to changing circumstances, and 3) action to prevent repetition of mistakes. Hence, this study aims to understand qualification and monitoring from a dynamic perspective where firms anticipate future events and constantly adapt to changes. Dynamic safeguarding capability can be described as the manufacturer’s ability to integrate, build and reconfigure internal resources and capabilities to create better qualification and monitoring processes (Teece, Pisano and Shuen 1997). The following model conceptualises the process of dynamic safeguarding capabilities. While controlling for adverse selection in the qualification process, the firm anticipates needs to prevent moral hazard (1 a)), and when controlling for moral hazard in the monitoring process the firm looks forward to needs or improvements for use in subsequent qualification procedures (1

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b)). This information is then used to change and improve the subsequent qualification and monitoring processes (2 a+b)). Dynamic safeguarding capability 1 b)

1 a)

Q1

M

Q2 2 b)

2 a)

Dynamic monitoring capability

Information use

Dynamic qualification capability

Dynamic qualification capability

Potentially, qualification is one of the most important mechanisms for preventing opportunistic action as it establishes the appropriateness of parties before engaging in a relationship. Wathne and Heide (2000) identify that in order for qualification to be effective, the relevance of selection criteria must be established. We suggest that in addition to traditional selection criteria (Spekman 1988, Stump and Heide 1996), criteria should be included to prevent active and passive opportunism, and be continuously adapted to changes in the market place. Dynamic qualification capability can be described as identifying new selection needs and attributes or changes to existing criteria for subsequent qualification during the monitoring stage. In other words, during the course of the relationship the manufacturer discovers whether the original selection criteria served its purpose. If existing selection criteria are insufficient to identify channel partners with the ability and motivation to serve the relationship, changes to existing criteria may arise, or new criteria may evolve. Incorporating these criteria in the next round will prevent taking onboard partners without the appropriate skills, resources and motivation. Dynamic monitoring capability

According to Williamson (1994), ex ante control efforts, such as qualification procedures, are often incomplete and must be supplemented with ex post or on-going monitoring (Stump and Heide 1996). It is suggested that monitoring effectiveness is based on the appropriateness of the monitoring criteria and that the monitoring criteria must be relevant to the particular form of opportunistic behaviour (Anderson and Oliver 1987, Ouchi 1980, Wathne and Heide 2000). Wathne and Heide (2000) suggest that, per definition, safeguarding against active and passive opportunism require that the forbidden behaviours and sources of shirking be established in advance. Selection criteria should be identified during the qualification process that, if misrepresented or contradicted, subsequently can be detected through ongoing monitoring of behaviours (Wathne and Heide 2000). Dynamic monitoring capability can be described as anticipating appropriate monitoring criteria at the ex ante qualification stage. Dynamic monitoring capabilities imply the ability to identify suitable monitoring criteria, and constantly adapt the criteria to changing environmental circumstances. We suggest that in order to achieve this, the manufacturer need to look ahead in time to anticipate potential future opportunistic behaviours to foresee appropriate criteria. In other words, before engaging in a long-term relationship the manufacturer employs pre-contractual qualification routines that looks forward to monitoring issues that may arise during the course of the relationship, and tries to control for such challenges before engaging in a contractual agreement.

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Conceptual model We present a model where a positive relationship is proposed between dynamic qualification and monitoring capabilities and behaviour in the channel. Organisational memory capability is proposed to moderate this relationship. Dynamic safeguarding capabilities reduces information asymmetry and makes it more likely that the manufacturer will have access to information that will reveal opportunistic behaviour, hence, preventing the distributor from engaging in opportunistic activities in the first place. Dynamic Qualification & Monitoring Capabilities Anticipation of qualification needs during monitoring

Safeguarding behavioural outcomes

H1 H3

Organisational memory capability Anticipation of monitoring needs during qualification

H4

Reseller compliance

Reseller adaptation Relational norm

H2

The qualification process solves potential opportunistic behaviour in two ways. First, the main outcome of qualification is to reduce information asymmetry within the channel relationship (Wathne and Heide 2000). By undertaking qualification efforts, elimination of organisations that fail to meet the selection criteria is made possible (Mishra, Heide and Cort 1998). Such standards may include reseller compliance, adaptation and level of norms (H1a, b, c). Resellers who fail to meet the specified minimum standards will be eliminated from the consideration set (Wathne and Heide 2000). Hence, qualified partners will be less opportunistically inclined, and behave in the best interest of the relationship. Second, by showing willingness to undergo a qualification process, the resellers can selfselect into the relationship. For example, qualification procedures allow for self-selection by favouring firms willing to undergo qualification (Stump and Heide 1996). By self-selecting into the relationship, it is likely that the problem with moral hazard is minimised, as the distributor has the skills and motivations to enter the relationship. In other words, only partners who are inclined to comply, adapt or rely on norms will self-select into the relationship. The relationship between dynamic qualification capabilities and safeguarding behavioural outcomes can be formally stated as: H1

The greater the ability to anticipate, integrate, build and reconfigure qualification needs during monitoring, the greater the a) Reseller compliance, b) Reseller adaptation, and c) Relational norm

Monitoring can curb opportunism in two ways. First, monitoring may increase compliance through social pressure on the partner. Murry and Heide (1998) found that by regularly monitoring compliance with promotional programs, manufacturers discourage opportunistically inclined resellers and motivate appropriate resellers to self-select into the relationship. Through the qualification process, the reseller is made aware that he will be monitored in the relationship. Hence, more likely that he will act in accordance to channel policies and programs, i.e. comply with established terms, policies and programs (H2a). If the reseller is aware that he is being watched, it is more likely that he will adapt to new circumstances and not act opportunistically by

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passively not adapting (H2b). If monitoring criteria is identified and incorporated at the qualification stage, it is possible to select partners with flexibility, solidarity and willingness to exchange information, i.e. rely on relational norms (H2c). Second, monitoring increases the ability to uncover opportunistic behaviour by the partner by reducing information asymmetry (Wathne and Heide 2000). Monitoring increases the ability to detect opportunistic exploitation. Hence, the manufacturer may place sanctions on the opportune party, or reward lack thereof. The relationship between dynamic monitoring capabilities and safeguarding behavioural outcomes can be formally stated as: H2

The greater the ability to anticipate, integrate, build and reconfigure monitoring needs during qualification, the greater the a) Reseller compliance, b) Reseller adaptation, and c) Relational norm

Organisational memory capability

Work in organisational learning theory has, among other things, considered ways organisations can acquire, disseminate and use information. Furthermore it has sought to understand how organisations store knowledge for later use. This notion of organisational memory is particularly important in safeguarding channel relationships. Huber (1991) argues that to demonstrate or use learning, what has been learned must be retrieved from memory, thus both the demonstrability and useability of learning depend on the organisation’s memory. Moorman and Miner (1997, p. 93) define organisational memory as “collective beliefs, behavioural routines, or physical artifacts that vary in their content, level, dispersion, and accessibility”. Based on recent research in organisational memory theory, we argue that organisational memory affects a manufacturer’s development of dynamic safeguarding capabilities in two ways. Firstly, organisational memory influences the interpretation of incoming information from the safeguarding process. Secondly, the organisational memory of success or failure of safeguarding efforts will influence unlearning or change in criteria in safeguarding mechanisms. The moderating effect of organisational memory capability on the relationship between dynamic safeguarding capabilities and safeguarding behavioural outcomes can be formally stated as: H3 H4

The positive relationship between anticipation of qualification needs and qualification performance will be stronger for organisations with high organisational memory capability The positive relationship between anticipation of monitoring needs and monitoring performance will be stronger for organisations with high organisational memory capability

Implications A study is undertaken to test these hypotheses, and provide for improved understanding for how complementary and dynamic application of safeguarding mechanisms can improve channel partner behaviour and organisational performance. While the notion of safeguarding mechanisms has received attention from researchers in the transaction cost economics literature and from agency theorists, available models are notably static. Our focus on safeguarding mechanisms and the development of an extended framework should help fill this void in the literature. This research aims at improving the effectiveness of qualification and monitoring by adapting a dynamic and complementary view.

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