Modes of Exporter Governance of Sales Subsidiaries...

Modes of Exporter Governance of Sales Subsidiaries and Distributors in

International Markets

Literature Review, Model and Test of Measurement Instrument

by

Carl Arthur Solberg Associate Professor

Research Report 5/2000

Norwegian School of Management BI Department of Marketing

Carl Arthur Solberg: Modes of Exporter Governance of Sales Subsidiaries and Distributors in International Markets © Norwegian School of Management BI Research Report 5/2000 ISSN: 0803-2610 Printing: Nordberg Hurtigtrykk To be ordered from: Juul Møller Bøker Phone: 67 55 74 51 Fax: 67 55 74 50 Mail: [email protected]

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Table of contents Introduction ............................................................................................ 1 Literature Review ........................................................................................... 5

Internationalisation Process School ............................................................ 5 Channel management and interorganisational relations ............................. 6 Multinational and Cross Cultural Management .......................................... 8 Summary of literature review ..................................................................... 9

A Model of Mother Daughter Relations in International Marketing ............ 11

Dependent variable – Export performance ............................................... 12 Independent variables – governance tools ................................................ 14 Control variable – stages of relationship .................................................. 15 The antecedents ........................................................................................ 19

Functional drivers of control mechanisms ........................................... 20 External drivers to control mechanisms ............................................... 28

Data analysis .......................................................................................... 33

General picture ......................................................................................... 33 Case company ........................................................................................... 36

Refinement of the measurement instrument ............................................. 39 Summary .......................................................................................... 42 Literature .......................................................................................... 43 Appendices .......................................................................................... 53

Appendix 1: Profile of participating companies ....................................... 55 Appendix 2: Spørreskjema MOR/DATTER prosjektet (Initial Norwegian version) .................................................................................. 57 Appendix 3: Revised questionnaire .......................................................... 63

List of figures and tables Figure 1: Theory streams and Mother-Daughter Relations in International Marketing ........................................................................................................ 9 Figure 2: Export governance models and export performance ..................... 12

Figure 3: Forms of control at different stages of exporter-distributor relationships .................................................................................................. 17 Figure 4: Governance mechanisms and nature of competition ..................... 29 Table 1: Constructs analysed: Critical factors .............................................. 34 Figure 5a: Relations between HQ and partner in country 1 .......................... 37 Figure 5b: Relations between HQ and partner in country 2 ......................... 38

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Modes of Exporter Governance of Sales Subsidiaries …

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Abstract This report presents and discusses a model of governance of sales subsidiaries and distributors in international markets. It was initiated by Interforum Partners, Asker and funded by Norwegian Research Council. The objective is to develop a model to support exporters in identifying critical problem areas in the relations between the exporter and its intermediaries in foreign markets, and to remedy possible flaws in these relationships. In order to investigate the different aspects of mother-daughter/distributor relations the research group from Interforum and Handelshøyskolen BI has carried out three tasks: - Identification of critical aspects of M-D relations in order to build a

model through literature reviews and brain-storming within the group. - In depth interviews with five companies in order to explore different

aspects of the established model. - Development of a model and its ensuing propositions to be tested in a

more general setting at a later stage. The model describes three control mechanisms (output, behaviour control and trust), their effect on performance and a three groups of antecedents (functional, relational and external factors). A moderating factor is the stage of relationship between the partners. A questionnaire was developed in order to capture the elements of the model, and tested in four companies and a number of their subsidiaries/distributors abroad. The managing directors of two of the companies were invited to discuss the results of the test, possible strategic avenues to follow and improvements of the questionnaire. The research has been made possible by funding from The Research Council of Norway. The author would like to thank Harald Biong for useful comments to earlier versions of this paper. Carl Arthur Solberg E-mail: [email protected] Phone: 47 67 55 73 63 Fax: 47 67 55 76 76

mailto:[email protected]

Carl Arthur Solberg

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Introduction The purpose of this report is to build an analytical model of HQ governance of foreign marketing activities through their sales subsidiaries and distributors. Although drawing on different streams of management literature, in particular internationalisation process, channel and inter-organisational relations and multinational and cross-cultural management, the model is mainly inspired by agency theory. It is the result of a research project carried out in collaboration with a Norwegian consulting group.1 The interest of the latter in this field stems from their own personal experience in their dealings with foreign sales subsidiaries and distributors. Both through consulting and own management experience the consultants have seen (too) many examples of faulty international ventures. In this context they maintain that the relations between headquarter (HQ) and its subsidiaries/ distributors abroad are paramount to successful exporting and to furthering the internationalisation process of the firm. It is therefore critical to identify problem areas in these relations and to find workable remedies. There are obvious differences between fully integrated channel systems (like exporter-foreign sales subsidiary) and independent distributors, the main differences residing in the fact that the power balance between the parties – or at least the base on which it rests - may be different in the two cases. First, the contract power of the exporter toward the distributor is not matched by the possibility of the principal in the integrated operation to exert both coercive and legitimate power (French and Raven 1959). Second the distributor often has a disproportionate size relative to the generally smaller exporter, which in this case gives the former the upper hand in the relationship. Indeed it has been found that both importers and exporters perceive the former to have the greater impact on marketing decisions (Leonidou 1989). Also, it has been claimed that organisational structure itself represents a control mechanism; according to Jaworski (1988), organisational structure (like for instance vertical integration) is an additional control mechanism in that it “directs influences and shapes individual and group behavior” (p. 27). However, there are also some notable similarities. First, they both operate as members of a system to promote the exporter’s products, and therefore aim

1 The project was initiated by Geir Storeng at Interforum Partners (IP) – a Norwegian consulting group. A task group was established with Mr. Storeng of IP and the authour in order to develop a more comprehensive project. A project team at BI was set up consisting of the following persons (in addition to Mr. Storeng and dr. Solberg): Bjørn Bugge, Tore Mysen, Egil Nordblom, Ulf Ombustvedt.

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at creating value in the chain. Secondly, fully owned foreign sales subsidiaries as well as foreign independent distributors are located overseas and have therefore not only a different perspective of the marketing situation than the exporter, but have also in common the expert power of the agent (French and Raven 1959, Sharma 1997). In this context we will later demonstrate that own subsidiaries confronted with orders from headquarters often tend to show muscles and operate independently. In order to investigate the different aspects of mother-daughter relations2 (for short M-D relations) the research group has carried out three tasks:

- Identification of critical aspects of M-D relations in order to build a

model through literature reviews and brain-storming within the group. - In depth interviews with five companies in order to explore different

aspects of the established model. - Development of a model and its ensuing propositions to be tested in a

more general setting at a later stage. A major concern throughout the work has been to combine theory with concepts and models that can be operated in a practical business setting. The next chapter gives a brief theoretical background for the model. Based on the theoretical platform we have carried out exploratory interviews with five Norwegian medium sized exporters. A brief description of these firms is given in appendix 1. The objective of these interviews was to give input to elements to be included in the model described in Chapter 3. Chapter 4 discusses the results of a test run of a questionnaire administered to four of the five participating companies, and discussed in some depth with two of them. Finally, Chapter 5 sums up the study, and indicates some implications for further research.

2 We will consistantly use the term “mother-daughter relations” although in many instances we also deal with exporter-distributor relations. When appropriate, the distinction will be made in the text. We will in the literature review discuss differences and similarities of the two organisational structures of channel management.

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Literature Review

Most managers confronted with foreign sales subsidiaries or distributors complain that it is not always easy to have it their way. Numerous anecdotal evidence reports of “self-governing” local petty kings, or rebellious distributors that make life a real challenge for the international marketer (see for instance Lipman 1987, Ghauri 1990, Forsgren and Holm 1990, Petersen, Welch and Welch 1998, Solberg 2000). Research in other settings (Stenberg 1992) suggests that steering systems (of foreign affiliates) be “a rather dispersed activity” (p. 210) and that most of the steering systems generally are being established as a response to detrimental developments in the relations with daughter companies rather than in an anticipatory way. In order to gain some insight into the problem area we will review the principal contentions of three streams of literature: internationalisation process, channel (or more generally) interorganisational relations and multinational and cross-cultural management. Internationalisation Process School The main claim of the internationalisation process school of thought is that firms’ international expansion takes place as a gradual learning process. Inspired by the growth mechanisms described by Penrose (1959) and by the concept of bounded rationality (Simon 1957), early writers of this strand of literature maintained that management takes increasingly bolder steps in their approach to international markets (Johanson and Wiedersheim-Paul 1975, Johanson and Vahlne 1977). At the outset, management - constrained by bounded rationality - has limited perspective of the scope of their international venture in its early phases. Also, limited experience makes management particularly vulnerable to local marketing decisions made by their partners – or worse - to opportunism by its foreign marketing partners which – in absence of their own expertise - may run counter to their long term interests in the market (Solberg and Welch 1996, Sharma 1997). In the latter case we do not necessarily speak of bad will or shirking by the partner (Williamson 1975), rather it is often a case of different interpretations of market opportunities. Given the inability of the exporter (limited resources/bounded rationality) to decide otherwise, he often displays a willingness (or rather: he has no other option than) to take the partner’s word for granted. With increasing commitment to international markets, involving better market knowledge, the exporter will with time develop new strategies including renegotiated partner contracts, new partners or alternative entry modes, for instance by carrying out own investments in sales subsidiaries (Petersen, Welch and Welch 1998, Benito, Pedersen and Petersen 1999, Solberg and Welch 1996). These changes in entry mode strategies are frequently a sign of frustrated exporters’ attempt to improve their

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international market performance through their distributor. However, even wholly owned subsidiaries often have a “bad habit” of seeking their own strategic solutions, sometimes in conflict with headquarter intentions (Ghauri 1990, Prahalad and Doz 1981). The internationalisation process school does not explicitly address the issue of governance. Rather, the emphasis is on learning about and increasing commitments to international markets (through different kinds of entry modes). On the other hand, the learning/commitment process is by this author supposed to have clear ramifications on control mechanisms, in that the efficiency of different control modes varies according to the ability of the exporter to carry them out. Some internationalisation studies have specifically shed light on relations between exporters and their foreign distributors. Ford and Rosson (1982) describe relationships between exporter and overseas distributor may be classified in five stages: new, growing, troubled, static, inert, and conclude that the “development process is not necessarily orderly or progressively over time” (p. 270). Rosson (1984) found in a follow-up study that most of the relationships have either become static or been terminated. Based on Moore’s (1991) taxonomy, Lye (1998) uses four development stages: emerging, growth, maturity and decline, stating that respondents were able to easily classify the different stages, but that the perceptions of the stage of development coincided in only 50% of the dyads under study. Channel management and interorganisational relations The link to channel management literature does not imply a big leap. A marketing channel may be considered a “superorganisation” (Gripsrud and Nygaard 1996, p. 151), where different actors play different roles in order to bring the product to the market. The traditional stream of channel management literature analyses the relationships from a rather belligerent angle, partly presupposing opposing interests and strategies by the two partners leading to conflicts and conflict handling (Stern and El Ansary 1992). Based on power dependence theory (French and Raven 1959), resource dependence theory (Pfeffer and Salincik 1978), principal-agent theory (Eisenhardt 1989) and transaction cost theory (Williamson 1975) the channel literature analyses power, governance and control, conflict and conflict resolution. In a critical review of transaction cost theory Ghoshal and Moran (1996) claim that the premises of this strand of literature – with its emphasis of the negative aspects of human nature (opportunistic behaviour based on asymmetric information) – self-fulfillingly lead business practitioners to take

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a rather conflict oriented stand towards its business partners. Contradicting this prophecy, research from Norway suggests that exporter-distributor relationships develop in a much more harmonious and integrated way, than seems to be the case in the transaction cost/principal-agent based models (Gripsrud, Solberg and Ulvnes 1999). It was found that well entrenched exporters typically would co-operate with their partners to get market information rather than controlling them to make sure they don’t act opportunistically. In this way an atmosphere of mutual trust will develop over time. Indeed, the basic foundation of any business relation is the trust that the trading partners foster in dealing with each other. Morgan and Hunt (1994) identify trust and commitment as the two key variables explaining satisfaction with relations between partners. Mayer, Davis and Schoorman (1995) distinguish three factors of trust: integrity (will not cheat or desert), benevolence (implying a more specific attachment) and ability (to carry out tasks related to the relationship). However, in international relations the mechanisms for developing trust may vary from one culture to the other. Contrasting East Asian relation oriented and integrative cultures with the more analytical and universalistic culture typical of the US (Hamden-Turner and Trompenaars 1993), Trompenaars (1994) shows how integrity may be practised in the two cultures. The Asians would typically say: “You cannot trust them; they would not even help a friend”, the American saying: ”They cannot be trusted because they always help their friends”…. (p. 34). On the other hand, in a study on commitment and trust in international marketing relations, Nes and Solberg (1999) found only limited (but significant) impact of cultural dimensions as defined by Hofstede (1980). Furthermore, a growing number of studies has investigated the strength of the relationship between trading partners (Biong 1994, Gassenheimer, Calantone and Scully 1995). Spekman (1991) has developed an eleven item scale to measure relationship processes where variables like for instance trust, fairness, notification of changes, open communication, expectation of long term business relations etc. have been identified as critical to the relationship. Lye (1998) – using Spekmans (1991) measures of co-operation relationships - found in a study of 36 dyads of New Zealand exporters-foreign distributors that importers and exporters do not share a common perception of the strength of the relationships, the importers generally being somewhat more positive than the exporters. However, exporters seem to take a longer term view of the relationships than importers in this study. He also concluded that factors like “age [of the relationship], recent sales growth, dependence of the exporter on the importer have no significant association with relationship strength” (p. ).

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Multinational and Cross Cultural Management Transaction cost theory discusses the conditions under which companies should integrate (rather than operate as independent units) their different activities, the fundamental premise being that internalisation of activities gives better rewards in terms of control and reduced transaction costs. It is suggested that the cost of controlling integrated channel structures outweighs the risks of opportunistic behaviour in cases of high asset specificity and frequent transactions. Concurrently with this stream of literature, research in (multinational) management displays an increasing disbelief in strict hierarchical control measures. Rather it is suggested that control be exerted through softer mechanisms such as organisational culture, empowerment and inter-unit communication (see for instance Bartlett and Ghoshal 1989 and 1990, Hedlund 1986). One of the challenges in this context is the transition from a centralised organisational structure to a less hierarchical structure. Bartlett (1986) claims that administrative heritage of companies restrain changes in the organisation. Hedlund (1984) suggests a pattern of lags between strategic change followed by structural change, which in turn is followed by change in management processes and finally social status of the different members of the organisation. Marschan (1993) confirming a similar pattern (of lags between structural changes, management processes and inter-unit communication) found that top led decentralisation programmes may generate resistance from and distrust between the decentralised units because of new and unclear roles and patterns of communication. Turning now to the more cultural aspects of multinational management, it has been found that managers from different cultures indeed have different values, beliefs and preferences (Hall 1959, Hofstede 1980, Laurent 1983, Trompenaars 1994, Schneider and Barsoux 1997). Schneider and Barsoux (1997) maintain that “the primary cultural determinants appear to be those related to relationships between people in terms of power and status and relationships with nature, for example how uncertainty is managed and how control is exercised” (p. 199). Accordingly, they present a taxonomy of cultures based on two of Hofstede’s dimensions, power distance (role of hierarchy) and uncertainty avoidance (need for formalisation). The ensuing cultural clusters of “Village market” (the Anglo/Nordic cluster), “Well-oiled machine” (Germanic), “Family or tribe” (Asian) and “Traditional bureaucracy – pyramid of people” (Latin) represent a compelling simplification of important aspects of management cultures. In the present context, this taxonomy suggests a differentiated approach to communicating and relating to sales subsidiaries and distributors. For instance, whereas subsidiaries in the Anglo-Nordic region may be given general guidelines for the development of the marketing activities, their

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Latin counterparts should be much more governed from HQ. On the other hand, independent intermediaries in the Latin region are typically expected not to comply with orders from an external principal. Asians will in this framework be more prone to accept and even seek advice from HQ, perhaps more based on trust and personal relations than on orders given from HQ. Finally, subsidiaries in the Germanic group of countries should expect unambiguous rules and definitions. Summary of literature review Figure 1 sums up this brief literature review. The internationalisation process school helps us understand the limits of strategic freedom of action of the exporter. The channel literature gives us insight into governance and control issues relevant to the exporter. The contributions of the interorganisational literature - with its emphasis on trust and commitment in relations - is of particular relevance to the present study. This seems even more important in international relations given the scope of possibilities for misunderstandings between different cultures. Finally, contributions from writers on multinational management guide us through the maze of strategy – structure - management processes – status - inter-unit communication, which exists in the junction between the exporter and its daughter companies/distributors.

Internationalisation process

- Stages of development- Limited resources- Bounded rationality

Relations betweenheadquarter and

intermediary

Channel management/Interorganisational relations

- Governance and control- Power and conflict- Trust and commitment

Multinational and cross cultural management

- Strategy - structure - process - status - communication- Impact of culture

Figure 1: Theory streams and Mother-Daughter Relations in International Marketing

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A Model of Mother Daughter Relations in International Marketing Based on the above literature review – and on in depth interviews with five Norwegian exporters and subsequent discussions within the project group – a model of exporter-representative relations was developed (see figure 2). Whereas numerous studies have sought answers to the questions on different factors’ impact on loyalty and conflict in distribution channels, very few have tried to establish a link between channel governance and the more tangible aspects of performance. Indeed, Solberg (1988), Cavusgil and Zou (1994) have shown that close and supportive relations with distributors in fact give dividends, whereas Bilkey (1984) found that there are limits to the return on dealer support. How then should the different elements of the above literature be accounted for in a model to guide exporters carrying out their policies to optimise the behaviour of the representative? Taking a principal-agent view of the channel management issues, Bello and Gilliland (1997) suggest an interesting model where they test how unilateral (through process control or output control) and bilateral governance structures are being influenced by a number of antecedents, and how they in their turn impact on exporter performance. Process or behavioural control may be described as the principal’s influence on the way in which distributors carry out the marketing activities (advertising, sales calls, etc), whereas output control contents itself with controlling the result of these activities (profit, sales volume, market share etc). They found that output control and flexibility of the trading partners correlate positively with performance, whereas no significant relationships were established between process control and performance. This model has inspired us to explore the relationships between three forms of control with export performance: output and process control and control through trust. These types of control may coexist but the emphasis placed on the one or the other may depend on the stage in the relationship between the partners (Ford and Rosson 1982, Lye 1998).

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Functional factors

IncentivesRole definition

Routines for dialogueMarketing support

Functional factors

IncentivesRole definition

Routines for dialogueMarketing support

Relational factors

Social BondsDependence

Investments in relationsMarket knowledge

Relational factors

Social BondsDependence

Investments in relationsMarket knowledge

Control mechanisms

Output control

Process control

Trust

Control mechanisms

Output control

Process control

Trust

Performance

Strategic

Profitability

Market position

Relationswith intermediary

Performance

Strategic

Profitability

Market position

Relationswith intermediary

Stage ofM-D relations

Stage ofM-D relations

External factors

CultureCompetition

Globalisatioin

External factors

CultureCompetitionGlobalisation

Figure 2: Export governance models and export performance. The model above uses some of the same variables as the Bello and Gilliland (1997) model. However, since we endeavour to develop a more comprehensive framework, which will be used as a tool to identify problem areas in MD-relations, we will have to include other factors as well. Dependent variable – Export performance Since the focal point in any business operation is to yield economic returns, the model will have as its main dependent variable different measures of export performance. This measure has during the late eighties and the nineties been subjet to scrutinity by a number of writers (Madsen 1987, Axinn 1988, Solberg 1988, Aaby and Slater 1989, Selnes et al 1993, Cavusgil and Zou 1994, Bello and Gilliland 1997, Styles 1998, Shoham 1998). The many factors – both internal and external - impacting on the exporting firm’s performance make it utterly difficult to establish reliable measures of their effects. Export operations consist of a mosaic of different ventures and

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strategic situations which makes the endeavour of gauging export performance exceedingly complicated. For instance, the time lags between the enacted decisions and the expected outcomes may vary considerably depending on the nature of the decision – like tactical decisions on pricing or advertising or decisions pertaining to strategic direction of the firm. In this context some of the exporters maintain during our conversation that it takes between three and five years before the results of the market entry yields any material rewards. Also different decisions will affect differently the various dimensions of performance (for example market share, growth, ROI). Then, depending on the goal preferences of company management, the measures of export performance will be emphasised differently. Therefore the importance of the various dimensions of export performance may vary according to the concrete situation of each individual firm. Furthermore, the many elements external to the object under study may disturb the overall performance of the operations even though everything was “done correctly after the book”. One of the managers in the exploratory interviews, commenting on his experience in this context, complained that “I’ll not say that I’m dissatisfied, but I wouldn’t say that we have had too much luck either”. In addition, performance may vary across export ventures - markets and products (Cavusgil and Zou 1994), and even across different marketing campaigns within the same product/markets. Styles’ measurement scale (Styles 1998), addresses many of the issues raised above. This scale is one of the most comprehensive among the measures being presented in the literature so far. Also it has been tested in two different countries (Australia and UK) and should therefore promise certain robustness in different settings. It contains three elements: - Strategic performance, - Market performance and - Economic performance (profitability). In addition, since the object under study is the effects of subsidiary/distributor control, Karanuratna and Johnson’s (1997) concept of satisfaction with the relationship is relevant to introduce. In this way different aspects of the performance will be analysed. Also, the model measures the performance per market, linking the performance to the relations with the intermediary in each individual market. Furthermore, the issue of measurement method should be discussed. Using perceived performance along the three dimensions (degree of satisfaction with performance as perceived by management) will reduce the sources of

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error of the more accurate measures of performance. For instance exact figures on return on investment drawn from the accounts sometimes reflect other concerns like taxes, provision for extraordinary losses etc. More or less precise estimates of market shares depend more on the way in which the “market” is being defined, than the real market position of the firm (see for instance Leontiades 1984). Finally, exact growth measures are questionable because they mean entirely different things in different market and competitive environments. By asking management about their degree of satisfaction on each of these performance elements, one gets a relative measure. In the words of Shoham (1998, p. 62): “satisfaction-based measures provide richer assessments of each subdimension, rather than additional, independent subdimensions”. The weakness of this measure is of course that the respondent gives his/her subjective opinion rather than mirroring the real situation of the firm. Independent variables – governance tools Bello and Gilliland (1997) discuss two groups of governance mechanisms: unilateral and bilateral. Unilateral governance may in turn be divided into two subgroups: output control and process or behavioural control. In output control the exporter supervises only the result of the activities of the distributor/daughter (like market share, sales volume, profit etc.), leaving the development of the marketing activities to the discretion of the latter. Process control involves a more active participation by the principal in the implementation of the strategy of the agent. Although output control in many ways is the governance mechanism of the independent distributor (market governance) and process control is much more the domaine of hierarchical governance (Eisenhardt 1989), one may conceive of both types of control in both types of governance systems. In both cases of unilateral governance the control of the distributor/daughter is based on information from the representative. Bilateral governance, on the other hand, implies relationship and co-operation (Nevin 1995) involving communication between the partners. A key construct in this context is that of trust. Trust seems to pervade business relationships (Morgan and Hunt 1994) and is seen by Bradach and Eccles (1989) as an alternative governance mechanism to price (market) and authority (hierarchy). De Mortanges and Vossen (1999) use in their survey of Dutch exporters the closely related concept of relational control, implying involvement of the distributor in planning and informational activities. Bello and Gilliland (1997) introduce in their model the concept of flexibility, implying the willingness of both parties to change the terms of an agreement, as a bilateral “control mechanism”. The relationship between flexibility and trust has, to the author’s knowledge, not yet been explored in academic

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research. We believe flexibility to be an antecedent to trust rather than a governance mechanism in its own right. For example, Nes and Solberg (1999) found that communication between exporter and distributor correlates positively with trust. These constructs reflect or are related to the concept of flexibility as defined by Bello and Gilliland (1997) in that both communication and co-operation are premises for an adaptive attitude characteristic of flexibility. Trust is however a broader construct and has been operationalised by among others Morgan and Hunt (1994) as a key construct in interorganisational relations theory. Basically it encompasses concepts such as willingness to delegate (critical tasks to the partner), confidence, reliance, predictability of ones’s expectations (Morgan and Hunt 1994, Dasgupta 1988). Trust is the outcome of long term relationships and is paramount in an international business setting involving high levels of uncertainty through both cultural, economic and political distance between the trading partners. Whereas trust between partners is mainly obtained in the interaction between individuals (of an organisation) the two other governance mechanisms are less personified and may be carried out by (individuals of) one organisation to control and monitor another3. Trust is therefore a much more difficult area to study because it encompasses a complex web of relations between members of the contracting parties, both inside each organisation and between them. One may well perceive of relationships featured by embedded relations and trust between some members of the two organisations and arms’ length relations and somewhat “cooler” sentiments between other members. Trust may furthermore be based on institutional arrangements (legislation, political stability, contracts etc), which reduces the external uncertainty surrounding the relations (Zucker 1986). Antecedents of trust will be further discussed in later sections. Control variable – stages of relationship The use of one form of control mechanism does not exclude the use of either of the other forms. On the contrary, although they are distinct from one another, they are strongly correlated (Bello and Gilliland 1997, Celly and Frazier 1996, de Mortanges and Vossen 1999). In other words, all three forms seem to coexist, but no attempt has been done to untangle the conditions under which one form is more preferable than the two other. The

3 Young (1993) claims that individuals can “feel” for other individuals in other organisations, or even for other organisations as such. However, she maintains, organisations cannot give affective expressions of another organisation and the concept of trust between organisations will therefore be qualitatively different than between individuals.

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basic assumption of the Bello/Gilliland model is that the more control (output/process) or cooperation (flexibility), the better the performance. However, they did not find support for the hypothesized relationship between process control and performance, suggesting that “inadequate knowledge about the foreign transformation process may prevent optimal manufacturer specification of marketing behaviours for overseas distributors” (1997, p. 34). This plausible explanation leads us to introduce stages of relationship (Ford and Rosson 1982, Lye 1998) as a moderating variable. Ranging the three governance mechanisms it seems as though there is an escalating order of commitment to the market starting with output control, then passing by process control and ending up with trust as the most committed mode of control by the exporter. Borrowing from Lye (1998) and Ford and Rosson (1982) we will generally postulate that the more entrenched the relationships between the partners, the more the exporter has to recur to trust as its main mode of governance. This is akin to the relationship development process taking place between buyer and seller as suggested by Dwyer, Schurr and Oh (1987) where they describe a gradual process of increasing commitment and shared value systems between the trading partners. Figure 3 shows that at each stage in the relationship between the exporter and its local representative - although all probably will coexist - different modes of control will prevail. The rationale for this differentiation of governance mechanisms lies primarily in the antecedents to control. We believe that - in the early phases of the relationship - the market knowledge of the exporter new to the market is rather limited, given the fact that its experience in the market is nil. Therefore it is deemed difficult for the exporter to exert any influence on the distributor with regards to the way in which it should formulate its strategies (behavioural control). Also the dependence of the exporter of the distributor in the initial phases of the relationship is normally limited, at least if related to the total sales volume of the firm. Therefore one may assume that the exporter will content itself with the arms length supervision mode represented by output control. As the exporter gains market knowledge and increases its general skills in international business operations, it is suggested that it will try to influence the local marketing activities more effectively by making use of different elements of process control. Also, “it is likely that the principal will learn about the agent and so will be able to assess behavior more readily” (Eisenhardt 1989, p. 62). Trust is supposed to derive from among other things social bonds and investment by the exporter in relations, and will therefore be demonstrated only after several years of collaboration, when the relationship between the

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partners is in a mature stage. Of course the inert stage described by Ford and Rosson (1982) is in this context a difficult one as it may occur at any time in the continuum emerging-decline stages. We suggest that is expected to occur between the growth and maturity stages and that governance of this kind of stalled relationship is characterised primarily by output control. The reason for this is the stalled nature of the relationship and the limited efforts that the exporter is expected to carry out in order to control the partner. Finally in the late stages of the relationship the exporter will only manage through output control because of reduced dependence of the partner.

Emerging Growth Inert Decline

Process control

Output control

Trust

Maturity

Figure 3: Forms of control at different stages of exporter-distributor relationships. This train of argument is contingent on many factors. First, the situation of the exporter establishing a sales subsidiary, rather than exporting through an independent distributor, is supposed to be slightly different. In this case it is suggested – based on the conclusions drawn by writers like Ghauri (1990) and Prahalad and Doz (1981) - that the exporter in the early phases of the relationship will exert hierarchical power through combined process and output control. Second, the relationship between the exporter and the distributor/sales subsidiary may well be the result of a change in entry mode (Benito et al 1999) rather than a de novo market entry. Therefore the market knowledge factor will in casu modify the governance form in the early phase of the relationship to more emphasis placed on process control. Also, how far the exporter has climbed “internationalisation ladder” will determine its ability to manage its relationships with its partners(s) (Johanson and Vahlne

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1977). The model epitomises the case of the early exporter rather than the well established one, the latter being supposed to resort to more behavioural control mechanisms also in the early phases of the relationship. Notwithstanding the different weights of the control mechanisms at different stages of relationship development, we will propose that trust in general leads to better overall performance than do either of the two other control mechanisms. Uzzi (1997, p. 37) state that “embeddedness creates economic opportunities that are difficult to replicate via markets, contracts, or vertical integration.” He later on (p. 43) shows how trust promotes access to “privileged and difficult to price resources that enhance competitiveness but are difficult to exchange in arm’s length ties.” We shall later show that trust is being enhanced by factors like social bonds, cultural closeness, communication and so forth. In other words trust is facilitated in cases where the partners feel comfortable with one another. Heide (1994, p. 83) emphasises that “to the extent that initial socialiazation efforts are ineffective, a failure to engage in systematic monitoring efforts represents exposure to opportunism”. One conclusion of this observation is that unilateral monitoring vehicles must be organised to reduce the propensity of the partner to behave selfishly (Bello and Gilliland 1997). On the other hand, it also suggests that the possibilities of socialising with individual key members of the partner organisation should be considered a key concern in precontractual screening of partners. The backside of the coin is that trust may also become a liability: it constitutes a fertile soil for company paradigm which seldom is challenged and thus represents a threat to competitiveness by the mere neglect of important market signals outside the embedded network . In our exploratory discussions with companies we perceive a general sentiment of trust between the partners (at least seen from the exporters’ standpoint). As one company manager expresses it: “When the company earns money, it is easy to trust your subsidiary management”. And when results are not up to expectations, they will certainly try and persuade local management to rectify it by giving concrete advice on customers to be served, or number of sales people employed etc. In other words the poorer the results the more the exporters will recur to unilateral (process) modes of control. One important outcome of trust between the partners was mentioned by one of the companies: the subsidiary manager dares to challenge HQ on their viewpoints. “In a country like the US where people are afraid to lose their job, this is of utmost importance”. In this way trust not only is a mode of governing subsidiaries, it also becomes an important vehicle to develop an atmosphere of exchange of viewpoints and ideas. Trust is also perceived by one of the interviewees to have an aspect of

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culture; he observed that “French people tend to give misguiding information” and are as a consequence not so easily trusted as their more Nordic counterparts.4 Although this may tell the story of a culturally inexperienced exporter, it is nevertheless an account of the importance of cultural familiarity in the creation of trust (Nes and Solberg 1999). To sum up this section, we will propose that, P1: The efficient use of control mechanisms of foreign channel members (sales subsidiaries or distributors) depends on the stage of the relationship between the trading partners. More specifically we posit that a) output control will prevail in the emerging, inert and decline stages of

the relationship b) process control will prevail in the growth stage of the relationship, and c) trust as a control mechanism will prevail in the maturity stage of the

relationship. The antecedents We have identified a number of antecedents impacting on the three levels of control. Some of these antecedents have already been discussed in the previous section. However a more systematic discussion is required to understand their impact on the different modes of governance. At this point we should remind the reader that the present research does not endeavour to explain the use of independent distributors versus integrating the marketing activities in a sales subsidiary – the basic discussion in most literature on channel integration (Anderson 1985, John and Weitz 1988) and foreign market entry modes (Anderson and Coughlan 1987, Klein, Frazer and Roth 1990). Rather we attempt to unravel the maze of channel management of both integrated and independent channel members, postulating that there are many common traits in the way in which these members may be treated. Also de Mortanges and Vossen (1999) seek to identify antecedents to the three types of control mechanisms, but include partly different kinds of antecedents than the ones used in the present research (asset specificity, volatility, diversity, resource dependence, market knowledge and distributor experience). Two of their variables – market knowledge and (resource) dependence overlap two of our variables. They found that market knowledge correlate positively with all three modes of control mechanisms, whereas resource dependence correlates negatively with both process and outcome control and exhibits only limited correlations with what they term

4 France and Norway score quite differently on the Hofstede dimensions: power distance - 68 (F) and 31 (N), uncertainty avoidance – 86 (F) and 50 (N), masculinity – 48 (F) and 8 (N). The score on individualism is quite similar (Hofstede 1980).

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relational control. The antecedents used in our model have been identified as a result of in depth interviews with five Norwegian exporters, and have been refined through group discussions among the members of the project team. In the following we have classified the antecedents in three categories: functional, relational and external drivers, and we discuss a number of propositions related to them. Functional drivers of control mechanisms We have identified four such drivers: incentives, role definition, routines for dialogue, marketing support. The common denominator of these precursors is their operative character. Incentives One of the fundamental premises of agency theory is the risk of the agent behaving opportunistically based on information asymmetry. Coupled with the assumption of partially different objectives between the two partners, the principal may use reward power (French and Raven 1959) in order to align the agent to comply with the goals of the former. Such reward may take the form of bonuses or commission based on sales volume or other economic indicators. We propose that such performance based reward power will have a direct influence on the control mode – more specifically will be manifestly related to output control. P2: Incentives based on performance (like bonuses, commissions etc.) will be related to output control mechanisms. Role definition Well defined institutions will lead to increased trust (Zucker 1986), not necessarily vis-à-vis the partner as such, but rather vis-à-vis the system. The benefit of institutions lies primarily in the predictability of actions between the partners and as such they reduce the internal ambiguity which exists in the relations. One such institution may be the “rules of the game” between the partners, like for instance a clear definition of roles between them. Well defined and mutually approved responsibilities between the partners help alleviate potential conflicts of interest and reduce possible misunderstandings, ultimately creating an atmosphere of co-operation and trust. A general division of labour where HQ leaves to the subsidiary/intermediary the responsibilities of local marketing and HQ only provides general guidelines concerning use of brand name, pricing policies, preferred customer groups and so on is indisputably easy to conceive of. The conflicts arise when HQ gets impatient with results and wants to take a more active part in the implementation of local activities, or when HQ for

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other reasons – like increased global competitive pressures - feels compelled to take charge (Solberg 2000). Also conflicts seem to arise in the wake of redefinition of roles by multinationals, partly because of uncertainty among the actors about the new roles (Marschan 1993). On the other hand, Larson (1992) has shown that in cases of lack of control and monitoring devices between firms (that is in cases where trust is an important governance tool), the roles between the partners are often blurred and shift. Also, Macauley (1963, p. 64) found that some businessmen object to elaborate contracts (in which agreed upon roles are defined), because such planning “indicates a lack of trust and blunts the demands of friendship, turning a cooperative venture into an antagonistic horsetrade.” The distributor contract is normally the vehicle through which roles are defined in an exporter-distributor relationship. However, the negotiation process to arrive at an agreed division of responsibilities has probably more impact on the relationship between the partners than the content of the final contract itself. Through a process of socialisation between the partners, exchange of information and objectives constitutes the starting point of what eventually may lead to a trusting relationship. This process has been observed by Khuri (1968) who – referring to the Middle East - states that: “bargaining is not for fun, nor merely for the sake of bargaining. Through the manupilation of cultural norms and symbols, a bargainer, whether seller or buyer, aims to eliminate suspicion of commodity or price and establish instead an atmosphere of trust often leading to client-relationship and occasionally friendship” (p. 704). Along this line of reasoning, it is likely that the distribution of roles between the partners evolve over time. In fact, in four of the five companies this seems to have taken place. In these companies the division of roles is to some extent the result of personal capabilities of the contracting partners, in addition to the more or less “objective requirements” dictated by the needs of headquarter (distance to the market, resources etc). One may therefore in this instance talk about a reverse loop of causality, whereby trust leads to definition of roles. In only one of the interviewed companies, we found that roles were strictly defined and independent of the persons involved. This company is relatively young in terms of international business.

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Summing up this section we postulate that: P3: Role definition is more frequently used in the emerging and growth stages of MD- relationships where social bonds have not yet had the chance to develop. Routines for dialogue Communication has been found to correlate with trust (Morgan and Hunt 1994). Indeed, Nes and Solberg (1999) show that communication is the single most important factor leading to trust between the exporter and its partners in foreign markets. Moorman, Deshpandé and Zaltman (1993) found that especially timely communication fosters trust. In an attempt to decompose the communication construct into elements that can be acted upon by management, we suggest that some form of institutionalisation of the communication process will lead to enhanced trust between the partners. One may contend that this line of argument is part of the same construct, institutions (Zucker 1986), as the role definition discussed above. However, one thing is the way in which information is transferred from one exchange partner to the other; how the partners agree to share the responsibilities of the marketing and sales activities in the local market is another matter, distinct from information sharing. Also, one may assume that different routines for dialogue apply to different modes of governance. A great deal of informal communication may well be linked to trust. On the other hand it may also reflect troublesome relations, whereby HQ constantly interferes with local affairs, following up on decisions and controlling – both formally and informally – that decisions are being implemented. Therefore, when measuring communication, not only the level, but also the “temperature” should be gauged. The companies in our study maintain that they have regular and active communication with their intermediaries in foreign markets – both formal and informal. However, in one of the companies the subsidiaries operate to a large extent on their own, without much communication with HQ. They do indeed send quarterly sales reports (formal), but do not discuss operative matters on a regular, frequent basis over the phone, e-mail and so on (informal). This company has established strict routines for performance and process controls, suggesting that there indeed may be a link between formal routines for communication and unilateral control mechanisms.

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We propose that: P4: Informal modes of communication are typical of relationships based primarily on trust, whereas more formal methods of communication will prevail in unilateral governance relationships. Marketing support Marketing support instruments may be divided into two major groups: functional incentives (Bergen, Dutta and Walker 1992) and geographic/product exclusivity. Functional incentives may be described as additional payments made to the local representative if it engages in specific activities, such as advertising, participation at trade fairs, initiating business with particular customer groups, financing of spare parts storage facilities etc. Exclusivity is advantageous to the local representative as it allows involvement in promotional activities without fear of “spillover effects” to competing members of the marketing channel; the total profits of such activities are expected to accrue to the representative. It has been shown that in certain circumstances (risk averse channel members) the manufacturer will benefit from non-exclusive contracts with – that is: free competition between - channel members. On the other hand, Dutta, Bergen and John (1991) show that exclusivity is more desirable when dealers perceive a long term relation with the principal. Such exclusivity contracts are however increasingly difficult to enforce in Western Europe as EU regulation restricts its use. We believe in general that P5a: The use of functional marketing support will foster an atmosphere of trust. Furthermore as its use and effects are more or less directly measurable, we propose that P5b: Functional marketing support is positively linked to use of behavioural control instruments. Exclusivity on the other hand is supposed to lead to increased trust. However, we treat exclusivity in this context – not as a marketing support device – rather it is seen as an institutional arrangement in line with routines for dialogue and role definition. Relational drivers to control mechanisms In this article we deal with basically five such drivers: social bonds, dependence, investment in relations with intermediary and market knowledge.

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Social bonds Social bonding has been defined as “the degree of mutual personal friendship and liking shared by the buyer and seller” (Wilson, 1995, p. 339). Our basic proposition that strong social bonds lead to trust is partially based on writings on social embeddedness in transactions (Granovetter 1985, Uzzi 1997). Contrary to the assumption by neoclassic economists, Uzzi (1997) in his study of New York textile manufacturers’ network found that embedded relationships indeed are rational through positive effects like trust, fine grained information transfer and joint problem solving arrangements. This in turn leads to advantages such as economies of time, integrative agreements, complex adaptation and allocative efficiency. Later, Uzzi (1999) has found that social attachments lead to more favourable terms of agreement by the SME in obtaining bank loans5. Social bonds have also been postulated to lead to trust by writers in the IMP6 tradition (see for instance Håkanson et al 1982). Also it has been shown that commitment between buyers and sellers increases with strong personal relationship (Wilson and Mummalaneni 1986, Mummalaneni and Wilson 1991). We will propose that social bonds between members of the exporter organisation and those of the daughter company or the distributor will lead to increased trust. Or as Uzzi (1997, p. 45) states: “Trust is fundamentally a social process, since these psychological mechanisms and expectations are emergent features of a social structure that creates and reproduces them through time.” On the other hand, the back side of the medal is when key members of either organisation for some reason move out of the organisation or merely to a new function within it. Then the risk is that what earlier has been a resource for the relationship, is turned into a liability. In Uzzi’s words: “Under these conditions, social processes that increase integration combine with resource dependency problems to increase the vulnerability of networked organizations” (Uzzi 1997, p. 57).

All the five firms state that they are more or less close friends with many of their sales representatives in overseas markets. Some managers state that “we have a nice time when we are together in business”, or “when we meet we are like friends”. Others claim that they are personal friends with the manager of the subsidiary, which may constitute a “danger”, in that it is difficult to separate business and friendship. On certain occasions this may

5 But he does not discuss the other side of the coin, the bankers’ loss. One may maintain that bankers run a lower risk lending to businesses whose leaders they know well, and that this is the economic rationale for accepting lower interest rates. 6 IMP=Industrial Marketing and Purchasing, an informal group of researchers who focus on interactions between companies in buyer-seller relationships.

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cause problems, like for instance when unpleasant decisions have to be made. However we observe some discrepencies between HQ and subsidiaries, the latter sometimes feeling more at unease with the socalled “friendship” of HQ. Still we expect to find: P6: The denser the social bonds between key members of the exporter organisation and those of the daughter company or the distributor, the more the governance will be based on trust. Dependence Dependence has been treated by a number of researchers of marketing (Hunt and Nevin 1974, Gaski 1986, Heide and John 1988, Anderson and Narus 1990). Dependence has been linked to investments in specific assets (Heide and John 1988) as well as other sources of power like the ones treated by French and Raven (1959). Agency theory assumes the notion of a powerful principal that has the power to design and enforce contracts. In contrast, in an exporter-intermediary relationship power balance will vary according to the situation. One may assume that the exporter has more power over the sales subsidiary than over the distributor, partly because of mere hierarchical power (a blend of reward, reference, legitimacy and coercion). On the other hand, the expert and informational power (Raven 1992) of the subsidiary may – at least in the early phases of market presence by the exporter – supersede the importance of these other power bases. Also, we have seen how subsidiaries at a later stage of the relationship have a tendency to become independent in their implementation of business strategies in the local market – principally because of expert-informational power (Ghauri 1989, Prahalad and Doz 1981). The distributor, furthermore, is often the stronger party in an exporter-distributor relationship – at least within the boundaries of the relevant market – partly because it normally represents a number of different principals in the market, thereby being less dependent on each individual principal. The extent to which this power plays a role will then depend on the importance attached by the exporter to attain a certain share in the market in question. The degree of dependence of one of the partners on the other is therefore assumed to impact on the mode of governance by the principal. Anderson and Narus (1990) suggest that the less dependent firm can enforce various strategies on the other party. Hence, it is proposed that the less dependent the exporter is on the next channel member, the more it is likely that it will content itself to recurring to output control (see also Frazier and Antia 1995). On the other hand, complete dependence on the partner invites the principal to carry out trust enhancing measures, thereby increasing trust, in order to compensate for the lack of power. Heide (1994) suggests that the dependent

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party should try to establish a “negotiated environment”, in which the burden of dependency is alleviated and the risks of opportunistic behaviour lessened. These propositions are partly consistent with de Mortanges and Vossen (1999) who found that resource dependence correlates negatively with outcome control, but not with relational control. Their definition of dependence was however more akin to Bello and Gilliland’s (1997) construct of resource inadequacy, rather than dependence on partner. P7: The more dependent the exporter is on the intermediary, the more it recurs to trust-enhancing activities (such as social bonds, investments in relations, development of market knowledge at HQ). Investment in relations Relationship commitment (Morgan and Hunt 1994) and commitment to partner companies (Nes and Solberg 1999) have been discussed and subsequently operationalised. Both have found strong correlations between trust and commitment. Morgan and Hunt (1994, p. 23) define commitment: “as an exchange partner believing that an ongoing relationship with another is so important as to warrant maximum efforts at maintaining it; that is the committed party believes the relationship is worth working on to ensure that it endures indefinitely”. Moorman, Zaltman and Deshpandé (1992, p. 316) defined it as “an enduring desire to maintain a valued relationship”. The way in which it has been operationalised (intentions, commitment, merit, desire) indicate that commitment is an attitudinal variable. We believe that the concept of investment in relations is more tangible, and therefore easier to relate to as an operational variable for company management. The two should however be strongly correlated and we propose that trust ensues from investment in the relationship. Other researchers have dealt with investments as adaptations to accommodate the partner (Håkanson 1982, Hallén, Johanson and Seyed-Mohamed 1991). For instance, Hallén, Johanson and Seyed-Mohamed (1991) found that investments in adaptation “tie the firms together in strong customer-supplier relationships, [forming] the basis for both business expansion and for securing current sales or supply sources” (p. 35). They maintain that adaptation behaviour will vary over the life time of the relationship: in the early phases of the relationship it is expected to be a way to develop trust, whereas in the more mature stages it will be a means of solidifying and expanding the relationship. P8: The more the exporter invests in the relationship, the more trust will constitute the main control mechanism.

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Market knowledge In the words of Sharma (1997), “Not knowing how the agent does a job is distinctly different from and compounds the problems of not knowing what the agent does” (p. 768, Sharma’s emphasis). The contention is here that market knowledge facilitates control and monitoring by the principal. Indeed, Gripsrud, Solberg and Ulvnes (1999) suggest indirectly that the way in which market knowledge is built at HQ may have an impact on the way in which relations between HQ and its channel intermediaries develop. Market knowledge may be built through own experience in the market (Johanson and Vahlne 1977), through co-operation with the intermediary, or through market information from third parties/secondary data or the like. Market knowledge was found by de Mortanges and Vossen (1999) to correlate with all three forms of governance mechanisms. Again, borrowing from Sharma (1997), “..[A]lthough principals can ‘purchase’ commodity information of the know-what kind so as to monitor and control agents, they are unlikely to be able to narrow similarly the asymmetry of expertise that is based in a specialized and dynamic body of knowledge – which is not a commodity” (p. 769, Sharma’s emphasis). Although there will be asymmetry of expertise (in our case market knowledge), we believe that the narrower this asymmetry is, the better the relations between HQ and intermediary. We propose in our research that the better the market knowledge, the better able the exporter will be to set benchmarks for output control and guidelines for behavioural control of the local representative. Furthermore, the greater its market knowledge, the more credible the exporter will be in developing a trusting atmosphere between the partners. Contrary, lack of market knowledge leads to uncertainty in the relational climate between the trading partners as the exporter is deemed to feel uncomfortable with market knowledge asymmetry. P9a: There is a correlation between the market knowledge at HQ about local marketing factors and the use of unilateral control mechanisms P9b: Increased market knowledge at HQ about local marketing factors leads to increased trust by the exporter in its local representative. Measuring market knowledge poses some great challenges. De Mortanges and Vossen (1999) use the perceived knowledge as expressed by managers (their knowledge of end users, customer requirements, general market knowledge). In our experience during our interviews we found that managers at HQ generally consider their own market knowledge as being better than is the view of their foreign counterparts at the intermediary level.

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On the other hand we believe that in relative terms (relative to other HQ managers) that the self-esteem is evenly spread. In regression analysis, therefore, this will have no direct impact. External drivers to control mechanisms Environmental factors, such as economic climate, technological change, competitor actions etc. lead to uncertainty about the outcome of the operations. The ensuing risks have to be borne by someone. In cases where the outcome uncertainty is high behaviour control is generally believed to be preferred (Eisenhardt 1989). We have introduced three external factors which we deem are relevant to the exporter: cultural, competitor and global factors. Cultural distance Bello and Gilliland (1997) found that psychic distance reduces the use of output control because “as psychic distance increases, monitoring and enforcement costs also increase” (Klein and Roth 1990, p. 32), ascribing the cost increases to difficulties in obtaining and processing control information from unfamiliar cultural settings. Even though this might well be the case, we propose that dealing with distributors and sales people from distant cultures it is easier to measure their performance than to influence their behaviour. Also, Morgan and Hunt (1994) found in their study a correlation between shared values and trust. Extending the concept of shared values to that of closeness in national cultures, Nes and Solberg (1999) show that cultural distance – using Hofstede’s (1980) four cultural dimensions – correlates negatively with trust and commitment. We therefore propose that P10a: The larger the perceived cultural distance the more the exporter will recur to output control, than the other forms of channel governance in international markets. An interesting dimension not captured by Hofstede (1980) is the dichotomy “organisation as a task - organisation as a social group” (Trompenaars 1993). Trompenaars’ research of managers in 53 countries found that some countries are more task oriented (Czechoslavakia and Hong Kong at the end of the scale) than others (Malaysia, South Africa at the other end). In a middle group we find countries like Australia, Belgium Netherlands, Norway. Task orientation involves a disposition to “get the job done” rather than looking after the well being of the members of the organisation. Hence P10b: The more task oriented the culture of the principal, the more the principal will tend to use unilateral control mechanisms (as opposed to trust).

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One may also assume that firms having reached a high level of internationalisation (Johanson and Vahlne 1977 and 1990) will differentiate their intermediary control systems between various host countries, because they are better able to take into account cultural differences between them. Thus it is posited that well developed exporters will use unilateral control mechanisms in countries scoring high on task orientation and bilateral control mechanisms in the more socially oriented cultures. P10c: Differentiation of control mechanisms based on cultural differences of intermediary operations will increase with degree of internationalisation of the firm. Competition and globalisation The competitive climate typically varies from one country to the other. This is particularly true in multidomestic industries (Porter 1986), but even in industries that are perceived as being global, an important element of local competition in each of the major markets in the Triad is customary. Thus, the exporter is confronted with a variety of different competitive situations around the globe. Solberg (1997) maintains that the competitive structure in international markets will frame the main strategic orientation of the firm, and shows that firms confronted with global market forces will react differently depending on their “preparedness for internationalization” (p. 15). Companies with low preparedness will typically adopt defensive strategies, whereas companies with high preparedness will act more aggressively. Along this line of reasoning, it is conceivable that control mechanisms will vary according to the degree of global competition and the ability of the firm to cope with the same. Figure 4 indicates the main implications of this argument for control mechanisms in international markets.

Industry globality

Prep

ared

ness

for i

nter

natio

nalis

atio

n

High

Low

Multilocal Global

TrustCombination

of controlmechanisms

Outputcontrol

Outputcontrol

Figure 4: Governance mechanisms and nature of competition

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As managers gain experience (increase their “preparedness for internationalisation”), they also increase their confidence and tend to recur to behavioural control mechanisms (Jackson, Deith and Schlacter 1983, Ouchi and McGuire 1975). In a multidomestic market environment they are still believed to mainly recur to trust as the prevailing mode of governance, as unilateral forms would require too much resources in a very differentiated market environment. Furthermore, in this position (high “preparedness for internationalisation”) the exporter scores high on most of the relational factors treated in the previous section, thus creating a fertile soil for a trusting relationship. This leads us to posit that P 11a: Internationally experienced firms operating in multidomestic markets will predominantly use trust as their main mode of governance. On the other hand, in global markets, dictated by the co-ordinated actions of global competitors, the company needs to have some control of the way in which operations are run in each market (Isdell-Carpenter 1986). This involves some kind of centralisation and formalisation (Nohria and Ghoshal 1994). It has been suggested that some sort of “clan” control (Ouchi 1979) - implying investments in shared values - is preferable to the more mechanistic output control in multinational enterprises (MNE) (Chakravarty and Lorange 1989, Marchan 1993). Clan control is distinct from behavioural control in that it presupposes socialisation of the partners and that they share the same values, thus reducing the scope for conflict. This is particularly critical in MNEs as it helps reduce the detrimental effects of cultural distance. Also clan control embodies elements of trust. In the words of Kim and Mauborgne (1993),

“to implement global strategies, multinationals need subsidiary managers with a sense of commitment, trust, and social harmony. Organizational commitment inspires these managers to identify with the multinational’s global objectives and to exert effort, accept responsibility, and exercise initiative on behalf of the overall organization - despite potential ‘costs’ at the subsidiary unit level…. [Trust] inspires subsidiary managers to more readily accept in good faith the intentions, actions, and decisions of the head office instead of second guessing, procrastinating, and opportunistically haggling over each directive”. (p. 602).

Moreover, Nohria and Ghoshal (1994) demonstrate that companies using a combination of shared values and differentiated fit perform better than companies that use either of the control forms. They define differentiated fit as a

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“strictly contingent approach that relies on a strong link between formal structure and action. Thus, adopting a formal structure (the right combination of centralization and formalization) that fits the different circumstances of the subsidiaries responds to both control issues as well as to the differences across the various subsidiaries” (p. 494).

The concept of differentiated fit then represents different aspects of unilateral control (behavioural and output). To conclude: given the competitive imperative of global markets and also the relatively more uniform market environment of global markets, and given the ability of experienced firms to set benchmarks for their partners, we propose that P 11b: Internationally experienced firms operating in a global market environment will use a combination of different modes of governance. Following the same line of argument we believe that the less experienced firms will take a more “ethnocentric” and less resourceful stance to control. They lack the experience to carry out behavioural control (Jackson, Deith and Schlacter 1983., Ouchi and McGuire 1975), and lack the resources to control through trust. Therefore in both competitive settings we believe that: P 11c: Companies with limited international experience will recur to output control as their main mode of governance of partners in international markets.

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Data analysis A questionnaire was administered to four companies (all but company C in appendix 1) and two – three of their local representatives in a number of different countries: Sweden, Finland, Germany, UK, Netherlands, France, US, Canada and Japan.7 Altogether twenty questionnaires were filled in. The purpose of this exercise was to:1) Identify critical areas for further investigation for the companies involved, and 2) test the questionnaire (attached in appendix 2). The first two sections of this chapter will report on the first aspect: critical areas of study, whereas the third section will discuss refinement of the measurement (revised questionnaire is in appendix 3). Critical areas of study - General picture This section submits a general view general picture based on the findings. In the next section we will present the discussions held with one of the case companies. Table 1 lists the constructs that were used in this context. Each construct is composed by a number of different items – varying from 2 to 7 that were measured on a five point Likert scale. The averages for each construct were calculated pairwise for each market, for instance HQ view of the French partner/the French partner view of the HQ. Thus HQ had to answer the same questionnaire for several markets. In order to get an idea of how critical the different factors are, we sorted out the factors where the average scores exceeded 3.0 and where the difference between the HQ and their local intermediary exceeded 1.1. The results of this analysis are shown in table sdf and indicate that four areas seem to stand out as particularly critical in mother daughter relations: - Guidelines for marketing activities given by HQ - Informal communication between the partners - Market knowledge at the HQ - Cultural distance between the partners

7 All five companies in appendix 1 were invited to participate, however, one of the companies declined to contribute in part two of the project.

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Table 1: Constructs analysed: Critical factors Numbers indicate number of observations Scores >3.0 Diff >1.1 Sum HQ D Role definition 2 2 3 7 Role development 2 3 4 9 Guidelines for marketing activities 3 7 5 15 Informal communication between partners 1 6 5 12 Formal communication between partners 1 3 4 Market knowledge at HQ 3 8 6 17 Empathy at HQ 1 1 2 Commitment to the partner 1 1 Investment in relation 1 2 2 5 Social relations 2 1 1 4 Power to control marketing activities 3 4 7 Cultural distance 6 6 4 16 Process control 4 5 1 10 Output control 1 3 4 8 Trust 1 4 5 Performance 1 1 2 Sum 31 50 43 124 The results also suggest that it is particularly at the intermediary level that the scores go above 3.0. This is particularly true with the three first factors. Even though the results of this very limited exercise should be handled with extreme care, we may speculate that the above factors play an important role in the relations between mother and daughter in international markets. One interesting observation is the relatively critical attitude toward HQ expressed by their partners in these respects. This is particularly true concerning market knowledge at HQ, where the latter generally consider themselves to be more knowledgeable than what is experienced by the local subsidiary/ representative. In one firm, however, management considers itself to have considerably less market knowledge than do its foreign counterparts. Still most of the disagreements at the intermediary level are observed on this very point. Also disagreements on and dissatisfaction with the guidelines provided HQ seem to play a role here. These two factors (guidelines and market knowledge) may also explain the differences observed regarding informal communication. Market knowledge at HQ and guidelines given by HQ will normally play a key role in the day to day contact between the

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partners. It is therefore tempting to conclude that the more HQ is kept abreast of the local market conditions and the better common understanding the partners have of the guidelines, the less reasons the partners will have to view the informal communication process differently. The perception by the interviewees of cultural differences also warrants some comments. Generally speaking the picture is very varied (from 1.5 to 5.0 on a five point scale), varying from one country to the other and also among companies. The most difficult markets seem to be overseas markets (Japan, US, Canada) but also the European intermediaries seem to represent cultural challenges to the Norwegian HQ management and vice versa. Areas of little or no problem are also worth while noting. Eight factors appear as important in this respect: - Incentives - Formal Communication - Empathy - Social bonds - Commitment - Investments in relations - Trust - Performance In other words, most of the relational factors seem not to cause much concern by either party – HQ or intermediary. Rather it is the more functional parts of the relation that trigger disagreements between the partners (guidelines, informal communication). The extent to which this gives reason to worry (for the firms involved) is not directly shown in the limited material that we have collected. However, proposition 4 suggests that informal modes of communication are typical of relationships based primarily on trust. In other words, if informal com-munication functions poorly, the development of a trusting relationship will suffer. In the present study, trust seems not to represent a major concern for the firms involved, scoring lower (better) than 3 in all but three relationships. On the other hand the mean score on trust is close to 2.0 (ranging from 1.1 to 3.1), indicating that trust is not totally free of commotion in the relationships that have been analysed. Even though many other factors are supposed to impact on trust (from the model: marketing support, social bonds, dependence, investments in relations, market knowledge, culture), one may speculate that the level of trust is being affected by faulty informal communication in this study.

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Guidelines have not been specifically developed as part of the model, but were identified during the interviews as one possible antecedents to control mechanisms. This factor may be akin to the institutionalisation of the relations, with much the same arguments as being put forward in the case of role definition (who takes care of which activities = role definition, in which way = guidelines). At the same time guidelines must be regarded in connection with process control or trust, without which guidelines seem inadequate. The data do not give us any foundation for further speculation in this context. The only relational factor that seems to cause concern is market knowledge. The main contention in proposition 9 is that market knowledge enables the exporter to set benchmarks for output control and guidelines for behavioural control of the local representative. Here again the data are inconclusive. On the other hand, one may infer that market knowledge to a certain extent smooth the progress of a trusting atmosphere between the partners which seems to be supported by the data.8 The forth problem area is that of cultural distance. One thing is observing that differences exist. Another matter is the extent to which observed differences in cultural distance really constitute a problem for the contracting partners. The mere observation of such differences may keep the partners on “their toes”, well aware of the problems associated with culture differences. Critical areas of study - Case company We have chosen case company A for presentation in this report in order to illustrate how the procedure may be used by a company in identifying potential problem areas in its MD-relations. It is a leading supplier to the leisure/sporting goods sector in Norway, with a strong brand name and some 80% market share in Norway. In key international markets they are market leaders. We have analysed the relationship between the company and its sales subsidiaries in two countries. Figures 5a and b give a general impression of the areas of conflict/ disagreement between the partners. 8 In a simple (“handcalculated”) regression, the data suggest that market knowledge explains a certain amount of the variance in trust (some 20%), thus lending some limited support to the proposition.

36


Guidelines

Role definition

Role rigidity

Formal communication

Informal communication

Social bonds

Empathy

Investment in relations

Commitment

Market knowledge

Cultural distance

Trust

Output control

Behaviour controlHQ Inter

Figure 5a: Relations between HQ and partner in country 1

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Carl Arthur Solberg

Functionswell

Functionspoorly

1 2 3 4 5

Guidelines

Role definition

Role rigidity

Formal communication

Informal communication

Social bonds

Empathy

Investment in relations

Commitment

Market knowledge

Cultural distance

Trust

Output control

Behaviour control

HQ Inter

Figure 5b: Relations between HQ and partner in country 2 Passing through the different items in the two figures (5a and 5b) with the managing director of the company gave us insights, not only into the disagreements between the partners, but also into the functioning of the questionnaire as such. First of all the observations of the company seem to corroborate the general conclusions: guidelines, informal communication (in country 1), market knowledge and culture appear as main areas representing potential problem areas. In addition, and deviating from the other MD-relations observed in the study, company A seems to believe that its investments in relations with its daughter companies are far higher than its daughters in both countries seem to perceive. Furthermore, mother and daughters seem to have different perspectives on their experience with output control and social bonds (country 1) and formal communication and role rigidity (country 2). It is difficult to draw any firm conclusion on possible links between the observed differences based on one case. They will however constitute and important starting point for internal discussion

38


between mother and daughter, in order to sort out any potential disagreements and misunderstandings. Refinement of the measurement instrument Many of the constructs used in the present model have been operationalised by others: output and behavioural control (Bello and Gilliland 1997, de Mortanges and Vossen 1999); trust (Morgan and Hunt 1994); performance (Styles 1998, Shoham 1998, Karanuratna and Johnson 1997); market knowledge (de Mortanges and Vossen 1999); dependence (Bello and Gilliland 1997, de Mortange and Vossen 1999); stages in relationship (Ford and Rosson 1982, Lye 1998); globality (Solberg 1997). Other constructs need further sophistication: for example constructs like market knowledge, role definition and rigidity, routines for dialogue, incentives and cultural distance seem to need further refinement. During the course of the research we discovered that some of the constructs used by others were difficult to use in a Norwegian context. For example some of the performance measures (Styles 1998) and control measures (Bello and Gilliland 1997) seem partly ill adapted and partly incomplete to capture the essence of the phenomena at hand as experienced by Norwegian firms. We have also included other constructs than the ones contained in the model (guidelines, objectives, commitment, influence to control the marketing mix). This report will not delve on the development of each of these constructs, rather we limit ourselves to presenting them in a revised questionnaire, see appendix 3.

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Carl Arthur Solberg

40


Summary The literature on governance of international partners have mostly emanated from the strategic management tradition (Bartlett and Ghoshal 1989, Hedlund, 1986, Chakravarty and Lorange 1989, Prahalad and Doz 1990, Nohria and Ghoshal 1994). There is an emerging literature using agency theory to explain governance of channel intermediaries (Bello and Gilliland 1998, de Mortanges and Vossen 1999). This article endeavours to introduce contributions from different fields of research in order to develop a comprehensive model of governance of foreign sales subsidiaries and distributors. In particular, using basic concepts of agency theory (control mechanisms) and supplementing by contributions from as different fields of study as for instance sociology, cross-cultural management, internationali-sation school of thought, global competition the model aims at capturing basic elements of both channel governance and international management. Most managers have established their own “truths” or “half-truths” concerning different aspects of international marketing strategy and how to control and monitor the activities of their partners in international markets. Also, each company has established a certain management style according to the beliefs expressed by these truths. These management styles are being articulated through both functional and relational factors, some of which of which have been captured by the presented model. The latter suggests that there are a number of different contingencies attached to the “best solution”. Among other factors, these relate to the stage of the relationship between the relational partners, to the level of international competencies/experience at HQ, to the nature of competition and to different cultural aspects in the intersection between the home and different host countries. The extent to which the relationship should be monitored by using either of the two unilateral governance mechanisms (output or behavioural control) or the more relation oriented bilateral mechanisms (trust) will then be contingent on the stage of the relationship between the partners and the strength with which the antecedents to the governance instruments are in effect. The proposed model should easily lend itself to hypothesis testing through mass distributed questionnaires to exporters. This article has developed 11 propositions and a number of sub-propositions. Yet it is possible to perceive of other propositions based on the model. For instance, different emphasis on various kinds of control may impact differently on the individual measures of performance (strategic, economic, market position, relations with partner). These possible variations have not been explored in this article. During our conversation with case companies we discovernumber of other important factors which were not initially accounted for in the model

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Carl Arthur Solberg

and the questionnaire: guidelines, objectives, influence on marketing mix and empathy. These have partly been taken into the preliminary questionnaire, and have been further refined in the revised version. Also, the model has excluded important factors. The most manifest one is the issue of channel integration, the argument being that integrated and independent channel members alike will have to be governed through more or less the same instruments. However, the different governance mechanisms may be used differently in the two situations, where factors like for instance power balance and cultural aspects come into play. One may moreover argue that it is easier to develop a clan atmosphere (Ouchi 1979) and to achieve mutual commitment between the partners in integrated systems. Indeed, preliminary research from Norway indicates that trust seems to be established more easily in integrated than in independent systems (Nes and Solberg, 2000). Furthermore, it is conceivable that it is easier for HQ of fully integrated channels to make use of unilateral governance systems than in channels consisting of independent intermediaries. So one conclusion may be that the same instruments are being used in both cases, but in integrated channels they are being used with more strength. Still, we do speak about dealing with relations between people or groups of people, and in both cases management systems have to take into consideration the flaws of human nature. The model should be developed not only to test hypotheses, but also to give management a tool in their endeavour to build relationships with their distribution and marketing partners in foreign markets. Therefore we have emphasised the construction of variables that are seen as relevant not only by researchers but also by members of the business community. In order to facilitate the data collection and analysis a PC based programme has been developed.

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Appendices Appendix 1: Profile of participating companies Appendix 2: Spørreskjema MOR/DATTER prosjektet (Initial Norwegian

version) Appendix 3: Revised questionnaire

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Appendix 1: Profile of participating companies

Company Industry Sales Export Entry mode in

Mill. NOK share % markets under study

Company A Sports equipment150 70Sales subsidiary

(10%)(10%) and

sales joint venture

Company BSoftware50010Sales subsidiaries

Company CSoftware50015Sales subsidiaries

Company DMechanical eng.15090Sales subsidiaries

and distributors

Company E Electronics 250 80 Sales representatives

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Appendix 2: Spørreskjema MOR/DATTER prosjektet (Initial Norwegian version)

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Appendix 3: Revised questionnaire

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