Paper to be presented at the EMNet-Conference on
” Economics and Management of Networks”
Budapest, Hungary, September 15-17, 2005
Partner Selection and Network Performance
An Empirical Analysis of Impact and Mediating Factors
in German Business Networks
Dr. Klaus MoellerChair of Management Accounting/Control
University of Stuttgart
Keplerstraße 17
D-70174 Stuttgart
Germany
Phone +49-711-121-3170
/ Nils Gamm
IPRI - International Performance Research Institute
Rotebühlstraße 121
D-70178 Stuttgart
Germany
Phone +49-711-6203268-0
Abstract
The impact of business network designs on their synergistic rent potential (network performance) is still an issue in research and management. In this context, partner selection is seen to be an essential strategic aspect because it determines the business network configuration. Thereby, future behavior of partners can also be affected. Trust, opportunism and commitment are regarded as key behavioral constructs in business network research. This paper aims to examine effects of a well-executed partner selection on the performance of business networks. We also analyse the mediating role of trust within, commitment to as well as opportunistic behavior in business networks. Hypotheses are founded on New-Institutionalism, Game Theory, Organization Theory, Relationship Marketing and Strategic Management approaches. A structural equation model has been tested within the first large scaled empirical study on German business networks. Based on results of this study we draw conclusions and give suggestions for future research.
Table of Contents
1Introduction
2Terms and Definitions
2.1Partner Selection
2.2Trust
2.3Network Commitment
2.4Opportunism
2.5Performance
3Model Development and Hypotheses
3.1Effects of Partner Selection
3.2Effects of Trust
3.3Effects of Network Commitment
3.4Effects of Opportunism
4Empirical Analysis
4.1Data Collection and Sample
4.2Construct Measurement
4.3Hypotheses Testing and Results
5Discussion, Limitations and Implications
References
Appendix
1Introduction
Numerous influencing factors like the growing dynamics and turbulences in business environment lead to a decomposition of organization’s boundaries and to a loss of the unique character of these boundaries. Thus, alternative organizational forms, especially business networks become increasingly important for acting in such an environment.[1] A basic assumption in the business network context is, that they can be more than a „zero-sum-game“ implicating one network partner’s benefit results from the other’s costs. In fact, business networks’ underlying hypothesis is providing the chance to link the individual profit “over additive” in the sense of a synergy realisation:[2] „relational rent as a supernormal profit jointly generated in an exchange relationship that cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners.”[3]
A basic problem business networks are confronted with, is the coordination of each partners’ goals and expectations. Missing partner compatibility and goal incongruence can lead to conflicts accompanied by opportunistic behavior. This highlights the relevance of partner selection as possibility for minimizing the risk of opportunistic behavior by building up trust and commitment to a network influencing network performance. Partner selection is of relevance to network performance as it constitutes the uniqueness of a business network and the partners` position within a network. It also determines network strategy and structure. For example, supplier selection is one of the key decisions in supply management as supplier’s performance has great impact on productivity, quality and competitiveness of the purchasing firm.[4] As New-Institutionalism argues, acting in business environment is accompanied by behavioral and environmental uncertainty, bounded rationality and information asymmetries, opportunistic behavior is an inherent problem of business networks. Critics of this approach argue, the focus on opportunistic behavior is not sufficiently discussed. Therefore, the aspect of trust has been identified as an important issue in interorganizational business relationships. In general, it can be assumed that a certain amount of trust is needed as threshold condition for successful interorganizational cooperation. Commitment is seen to be another important aspect that affects the relationship between network partners implying the renunciation of short-term opportunism and the alignment with long-term value creation. Furthermore, it can be assumed, that absence of commitment may encourage opportunistic behavior. Thus, partner selection determines behavior of network partners and network performance.
This study aims at two goals: On the one hand it examines effects of a well-executed partner selection on the performance of business networks. On the other hand mediating effects of the behavioral constructs trust, commitment and opportunism on network performance will be examined. This study tests such correlations by a conceptualization and examination of a structural equation model. Due to underlying conditions of this study explained later, the results have more an explanatory than a confirmatory character.
This study contains five parts: After this introduction some theoretical pre-considerations for the following study are made as well as the study’s underlying terms and definitions are discussed in part 2. Afterwards, the research framework and hypotheses are derived from underlying theories in part 3. The description of the empirical study and its results are pointed out in part 4. Based on these results conclusions and future research implications are given in part 5.
2Terms and Definitions
Numerous theoretically deduced and/or empirically verified criteria are discussed having an impact on success of a cooperation.[5] This study is based on the assumption that the behavioral aspects trust, commitment und opportunism are determined significantly by partner selection. As shown in Figure 1, the research framework is based on contingency approach and examines the effects of a well executed partner selection on the behavior al constructs trust, commitment and opportunism as well as the effects of partner selection and the mentioned behavioral constructs on network performance. Initially, before we give a short description of the empirical study’s underlying constructs, theoretical pre-considerations are made.
Figure 1: Research Framework
Within the scope of (theoretical) cooperation research, a variety of explanations and configuration approaches for business networks exist. Especially, proposals like
- New Institutionalism (in particular Transaction Cost Economics and Agency Theory),
- approaches of Strategyal Research (in particular Market-based View and Resource-based View),
- Relationship Marketing approaches (e.g. Commitment-Trust Theory)and
- approaches of Organization Theory (e.g. cooperative/non cooperative Game Theory, Systems Theory, Contingency Theory, Evolution Theory )
are often used in cooperation research.This study aims to develop and survey a theory-based causal model. A holistic and comparative evaluation of each of these approaches appears not to be appropriate in this case. Such an approach would either restrict the perspective to an already known theoretical perspective or it would lead to a new “network theory”. Due to the enormous research activity in this research field both approaches seem to be less adequate. Instead, hypotheses should be developed based on postulated coherences of different theories and should be tested by empirical data. On that account, the intention of this study is the selective application of particular (necessarily competing) “theory components” and not a concept of an integrative network theory.
However, it is necessary to have a precise explanation of the examination object. Due to a huge amount of literature on cooperation in almost every scientific managerial and economic domain, the use of different network terms and definitions is extremely high.[6] In this study, business networks are distinguished as a special form of cooperation, whereas cooperation represents a generic term for different forms of interorganizational cooperation.[7] The voluntary character of the business network formation seems to be an especially relevant associated mechanism.[8] Another attribute to business networks is the limited autonomy of decision. On the one hand cooperating with partners under full autonomy does not fit with the network idea, on the other hand the voluntary network formation is foiled at total dependency.[9] A further essential attribute is that at least three companies have to be involved in a business network.[10] Thus, a business network is a voluntarily-based interorganizational cooperation with at least three companies, which are constricted partially in their entrepreneurial autonomy by cooperation.[11]
2.1Partner Selection
Partner selection aims at identifying the network partners’ potentials for a joint value creation. Therefore, partner selection is tightly connected to the business network formation and regards primarily to strategy, structure, and partner decisions.[12] Only if value-adding potentials (in the sence sense of processes, competencies, resources or similar) leading to advantages (in the sence sense of a better output-input-relations) at the process of cooperative providing, goods and services are identified,businebbbusiness networks will be formed.
Hence, depending on the specific context a partner selection includes a large number of interrelated negotiations and decisions concerning (objective and subjective measurable) criteria like finance, contracts, information exchange and organizational structures (e.g. supply management, production). In the supply management context, Dickson identifies 23 commonly used selection criteria (see Figure 2).[13]Ellram emphasizes financial issues (e.g. financial stability an economic performance) and managerial, organizational and cultural issues (e.g. strategic fit and top management compatibility) as well as technological/technology issues (e.g. design and manufacturing capabilities).[14] Selecting potential network partners is based on an analysis and evaluation regarding such criteria and the overall fit.
Selection Criteria1. Delivery / 9. Communication System / 17. Packaging Ability
2. Performance History / 10. Reputation and Position / 18. Labor Relations Record
3. Warranties and Claims / 11. Desire of Business / 19. Geographical Location
4. Production Facilities / 12. Management and Organization / 20. Amount of past business
5. Price/Cost / 13. Operating Controls / 21. Customer Service
6. Technical Capability / 14. Repair Service / 22. Training Aids
7. Financial Position / 15. Attitude / 23. Reciprocal Arrangements
8. Procedural Compliance / 16. Impression
Figure 2: Dickson’s Supplier Selection Criteria
As mentioned above, partner compatibility is a pivotal factor determining behavior, strategy and structure in business networks.[15] Misfits in strategy, structure and culture represent potential conflict areas and imply a permanent risk of opportunistic behavior. Therefore, a permanent evaluation of potential and existing partners analyzing the partner fit is a necessary condition for successful business networks. In principle, several dimensions of fit have to be considered such as the strategic fit, the financial fit, the cultural fit, the organizational fit, the communication fit or the IT fit.
The risk of potential conflicts can be reduced by a strategic fit as partners have the same size and/or power, as they have mutual requirements for resources and capabilities and as they have complementary goals (at least not contrary goals). Crucial about the strategic compatibility is the partners’ contribution in a way that cooperative competitive advantages will result. Thus, partner selection has to provide the identification of these (compatible) potentials as well as an adequate implementation, whereas a corresponding perception is a necessity.[16] The essential issue in reaching the network goals are partners being suitable concerning their competences and intentions as this influences future resource allocation and network regulation. If partners’ goals are not compatible, network coordination is very expensive, at risk or even impossible.[17] This implies an assessment of each partner giving access to resources and capabilities. Heterogeneity and complementarities of resources and capabilities as well as the possibility of combining them synergistically have to be assessed as well. As Dyer/Singh formulate, relational rents accrue from the capability of finding partners with complementary resources and relational capital (e.g. the willingness and ability to act cooperatively).[18]
Closely connected with this, goal congruence is another aspect that has to be mentioned.[19] Various publications identify goal congruence between partners as an important factor for development of competences and network goal achievement.[20] Goal congruence means a combination of the partners’ current strategic goal systems to a higher level network goal system under the consideration of each partners strength and competencies.[21] Thereby, both the individual partner goals and the network goals should be reached. To a certain extent, this implies a subordination of individual partner goals under the collective network goals as well as a constraint of the company-owned freedom of action.[22] According to Das/Teng the joint goal-setting process is a pivotal formal and social coordination mechanism within cooperation. By collaborative decision-making and goal-setting within the scope of partner selection, partners develop a better mutual understanding of each other.[23]
Besides the business network goals resulting from a “network strategy”, that are required for formal control, a network culture is essential for informal control/coordination. In an ideal case, common values and norms or even a network culture can evolve towards such a goal-setting process. A result of such a joint network goal system should be harmonized interests minimizing incentives for opportunistic behavior.[24] Relational rents can only be realized, when organizations have compatible (formal) systems as well as a compatible culture fostering cooperative actions.[25] At this, the cultural fit has to be considered especially against the background of friction between the network partners. However, partner selection should not necessarily aim on similarities between each partner’s culture. Furthermore, selection should concentrate on mutually fertilizing cultures that enable (inter-) organizational learning.[26] According to Child/Faulkner, partner selection has to identify possible cultural barriers counteracting a smooth cooperation.[27] Thus, cultural compatibility not only includes management control systems and management decision behavior, but also attitudes, values and norms.[28]
However, partner selection is not a one-time job. A permanent positive and negative selection has to take place evaluating partners with regard to a maintaining cooperation or an exclusion of the cooperation. Thereby, permanently securing a network from opportunistic behavior of partners as well as providing the adaptability and responsiveness have to be considered as substantial conditions for successful business networks.
2.2Trust
Trust is regarded as precondition and pivotal part for a working relationship within business networks.[29] In principle, two views on trust can be identified in the accordant literature: “(a) a business risk view based on confidence in the predictability of one’s expectations […] and (b) a view based on confidence in another’s goodwill.”[30] As Arrow formulates, “virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time.”[31] Following Deutsch and Zand, trust may be defined “as consisting of actions that (a) increase one’s vulnerability (b) to another who is not under one’s control, (c) in a situation in which the penalty (disutility) one suffers if the other that abuses that vulnerability is greater than the benefit (utility) one gains if the other does not abuse that vulnerability.”[32] This definition underlines the importance of confidence in another’s goodwill comprising the belief in other partners’ positive actions as well as a negation of unexpected actions of partners resulting in negative network outcomes.[33]
Trust might be interpreted as a qualitative code that is integrated in structural codes of communication in a parasitic manner acting as „lubricant“ in business relationships.[34] Following Luhmann, trust is a highly effective possibility to reduce social complexity by bridging over gaps of incomplete or non-existing information about future partner behavior.[35] Trust transforms uncertainty into risk and thus allows to coordinate interactions.[36] Contrary to opportunism, trust contains a positive assumption about the motives and intentions of other partners. Trust also means, that a partner relies on the non-opportunistic behavior of the others.[37]
According to Giddens,trust is crucial with an absence of knowledge and information in system processes.[38] From this Structuration Theory perspective, trust is a reflexive form of acting with confidence of reliability towards the other partners or organizations. Thereby, trust is considered on personnel and institutional level, whereas institutional trust plays a decisive role in the business network context as organizations trust organizations. Believing in abstract principles, like perceived processes or rules at the partner(s), are more relevant in business network context like trust in individuals.[39] But Giddens also emphasises, that these abstract principles are not sufficiently building up institutional trust. Therefore, trust must be stabilized by individuals acting at interfaces between organizations by outcomes and events of their acting.[40] This means that trust always bases on experience and belief towards the acting reliability and integrity of the partners and oneself. This implicates trust is always condition and result of cooperative acting.[41]
As this discussion points out, trust can be considered as another major determinant of relationships within business networks that are determined among other things by partner selection.
2.3Network Commitment
Similar like trust, commitment is considered to be an essential ingredient for successful long-term business relationships.[42] Commitment can be defined as “an implicit or explicit pledge of relational continuity between exchange partners.”[43] This point of view comprises an acceptance of short-term sacrifices in order to realize long-term benefits. It is associated with the partners’ willingness to invest (tangibly and intangibly) in network specific assets demonstrating reliability regarding the future.[44] According to Grundlach/Achrol/Mentzer´s conceptualization,an instrumental, an attitudinal and a temporal component of commitment can be identified:[45]
- Commitment as calculative act: Commitment as an input or instrumental component is an affirmative action taken by a partner, that creates a self-interest stake in a business network demonstrating something more than a mere promise.
- Commitment as attitudinal component: Commitment can be also described as attitude signifying an enduring intention by the network partners to develop and maintain a long-term relationship. Attitudinal commitment shares common domains of meaning with other behavioral constructs such as motivation, identification, loyalty, involvement and behavioral intention.
- Commitment embraces a temporal dimension: Commitment involves the desire or intention to maintain a valued relationship into the future implying commitment embraces a temporal dimension.[46]
In this context, partner selection in its function as ex-ante and ex-post controlling instrument determines commitment as only partners with appropriate strategies, structures and cultures will be affiliated to the network.
2.4Opportunism
Interaction and exchange relationships between network partners are a key point in regarding business networks as they influence the network structure and performance. According to Giddens every relationship is taking risks.[47] For example, such a risk results from not having enough information about the input and future behavior of a (potential) partner available. Often, relationship quality cannot be anticipated as well as its development over time. Another important aspect in this context seems to be the fact that benefits and liabilities are not generated simultaneously. Hence, network formation always includes the risk of opportunistic behavior as partners have to take a risky input.