Combining Formal Controls to Improve Firm Performance

• Date: 01 December 2013
• Published date: 01 December 2013
• DOI: http://doi.org/10.1111/jbl.12028
• Author: John P. Saldanha,Jason W. Miller,John E. Mello,C. Shane Hunt

Combining Formal Controls to Improve Firm Performance

Jason W. Miller

1

, John P. Saldanha

1

, C. Shane Hunt

2

, and John E. Mello

2

1

The Ohio State University

2

Arkansas State University

Formal controls are an essential part of organizational design, and are theorized to positively influence organizational performance. Mello

and Hunt ([2009] Transportation Journal, 48:20–39) were the first to suggest using formal controls to influence truck drivers’behavior.

Extending the salesperson control literature, they documented an underresearched method of formal control that we term technology control,

whereby firms use on-board and communications technology to influence drivers. We build on their work by investigating the contingent effects

of formal controls that influence the behavior of truck drivers and thereby influence the operational performance of firms in the U.S. motor car-

rier industry. Our work integrates the monitoring aspect of agency theory with the theory of operant conditioning and the theory of psychologi-

cal reactance to develop a rationale for hypothesized contingent effects of formal controls on motor carriers’operational performance. We

collected primary data pertaining to the controls used to influence truck drivers’behavior from a large sample of U.S. motor carrier firms. The

results of our analyses using nonlinear structural equation modeling suggest a complex set of relationships between formal controls and opera-

tional performance. Our results shed light on scenarios where using technology to monitor driver behavior can result in positive and/or negative

organizational outcomes.

Keywords: agency theory; theory of operant conditioning; theory of psychological reactance; formal control; survey; nonlinear structural

equation modeling; moderation

INTRODUCTION

To achieve a firm’s goals, management faces the challenge of

ensuring that subordinate employees carry out the work dele-

gated to them (Jacobides and Croson 2001). This challenge, rep-

resenting the classic principal–agent problem (Rungtusanatham

et al. 2007), is particularly acute in settings where managers do

not directly supervise employees (Heskett 1987). Truck drivers

clearly work outside direct management supervision, even though

their performance has a direct and significant impact on the

extent to which a firm meets the criteria, for example, on-time

delivery, that shippers emphasize in carrier selection decisions

(Mello and Hunt 2009). Despite the importance of motor carrier

firms’need to find ways that positively influence drivers’behav-

ior (Hubbard 2000; Baker and Hubbard 2004), scant research

exists on this topic. Mello and Hunt (2009) are the first to pro-

vide a framework of truck driver formal controls, which they

adapted from the literature on formal salesperson control in

marketing.

Formal controls are written management-initiated mechanisms

implemented to increase the probability that employees will

behave in ways that support the objectives of the firm (Jaworski

et al. 1993). Mello and Hunt (2009) propose their framework as

a guide to improving motor carriers’operational performance,

which we define as the extent to which a firm provides reliable,

on-time delivery services and is responsive to customer requests

(Stank et al. 1999, 2003). Mello and Hunt’s (2009) exploratory

work is of central importance to the field because (1) they define

the use of technology as a formal control and (2) they provide

initial evidence suggesting that the effectiveness of each formal

control is contingent on the use of other formal controls. Consis-

tent with Mello and Hunt (2009), we define technology control

as a formal control whereby management uses on-board com-

puter and communications technology to monitor the behavior of

drivers.

The primary aim of this research is to empirically test whether

the formal controls, including technology control, used to man-

age truck drivers have contingent effects on motor carriers’oper-

ational performance. With the exception of Mello and Hunt’s

2009 study, the control literature in marketing has failed to con-

sider the use of technology as a formal control. In addition, the

contingent effect of controls on the behavior of remote employ-

ees and in turn on the performance of firms remains an underre-

searched topic (Baldauf et al. 2005). The principal–agent

problem is a good lens for characterizing the challenge that man-

agement faces in attempting to control driver behavior because

there is likely to be a misalignment between the goals of man-

agement (principal) and those of drivers (agents). And this mis-

alignment is exacerbated by the inability of management to

directly supervise drivers such that drivers have an information

advantage over management (Hubbard 2000; Jacobides and Cro-

son 2001). Therefore, agency theory is particularly relevant to

the management of truck drivers as it explains the use of tech-

nology control, which reduces management’s concerns over dri-

ver moral hazard (Holmstr€

om 1979) by making drivers’behavior

more observable (Eisenhardt 1989).

However, agency theory assumes that both the principal and

the agent make economically rational decisions to maximize their

respective utility (Eisenhardt 1989). Thus, agency theory can nei-

ther explain the scenario in which management specifies rules

for drivers to follow and then does not monitor or follow up on

drivers’adherence to those rules, which wastes resources, nor

explain the scenario in which management exercises excessive

control such that there are negative outcomes for the firm’s per-

formance. Importantly, many instances of excessive management

control resulting in negative firm-level outcomes have been

Corresponding author:

John P. Saldanha, Fisher College of Business, The Ohio State

University, 524 Fisher Hall, Columbus, OH 43210, USA; E-mail:

saldanha.8@fisher.osu.edu

Journal of Business Logistics, 2013, 34(4): 301–318

© Council of Supply Chain Management Professionals

identified (Sewell and Barker 2006). Therefore, consistent with

the recommendations of other scholars (Eisenhardt 1989; Bergen

et al. 1992), we complement agency theory with other theoretical

lenses. Brehm’s (1966) theory of psychological reactance com-

plements agency theory by explaining how excessive formal

control can have a negative impact on organizational performance.

The theory of operant conditioning further complements agency

theory by providing a rationale for why specifying rules without

monitoring and providing contingent consequences, results in no

improvement and even in negative outcomes (Komaki 1998).

Drawing on these complementary theories, we develop hypothe-

ses to answer our central research question: What are the contin-

gent effects on motor carriers’operational performance of

subjecting truck drivers to various formal controls? The design of

our study relies on in-depth field research: we developed a mea-

surement instrument for a national survey through which we col-

lected the primary data used to test our hypotheses. In answering

this research question, our paper addresses a number of gaps in the

literature: (1) we explore the potential of technology control to

function as a formal control of employees working outside direct

supervision and (2) we show the contingent effects of formal con-

trols, including activity control, process control, and technology

control, on motor carriers’operational performance. Furthermore,

we introduce the Latent Moderated Structural Equations (LMS)

approach developed by Klein and Moosbrugger (2000) to conduct

nonlinear structural equation modeling (SEM) (Kelava et al.

2011). LMS directly forms interactions and curvilinear effects

between continuous latent variables, thus enabling analysis at the

error-free latent-variable level. This results in unbiased parameter

estimates, unlike traditional regression approaches to moderation

in which estimated effects are attenuated in the presence of mea-

surement error (Aiken and West 1991).

LITERATURE REVIEW

Truck drivers are part of the broad group of frontline logistics

personnel essential to the success of logistics operations (Keller

et al. 2006, 2010; Keller and Ozment 2009; Ellinger et al. 2010;

Bode et al. 2011). Recent research has tended to focus on the

areas of logistics frontline personnel working in warehouse oper-

ations (Autry and Daugherty 2003; Voss et al. 2004; Keller et al.

2006, 2010) and third-party logistics operations (Ellinger et al.

2010). However, as Keller and Ozment (2009, 397) note, “Truck

driving responsibilities and working conditions are unique,”

which can be attributed in part to the fact that truck drivers work

outside direct supervision. Ensuring that they perform in accord

with company rules and policies, therefore, presents an additional

challenge to management (Heskett 1987).

The logistics discipline has a long tradition of research on

issues pertaining to recruiting, training, and retaining truck driv-

ers, as well as on influencing their behavior. Beginning with

recruiting (LeMay and Taylor 1988), researchers have explored

numerous strategies for addressing the driver-retention problem

(Keller and Ozment 1999; Keller 2002; Suzuki 2007; Garver

et al. 2008; Suzuki et al. 2009; Williams et al. 2011). With

regard to making a direct impact on how drivers do their jobs,

research has focused on factors that influence safe driving (Mejza

et al. 2003; Cantor et al. 2010; Corsi et al. 2012). A small subset

of studies in this research area examine drivers’interactions with

technology and its influence on driver safety practices (Cantor

et al. 2009; Hickman and Hanowski 2011; Horrey et al. 2012)

and turnover rate (Cantor et al. 2011). Such studies respond to

Keller and Ozment’s (2009) call for “research pertaining to the

interaction of logistics personnel and technology,”which is

“most conspicuously absent from the literature”(p. 396). The

current paper extends this literature by considering ways motor

carriers can use control strategies to complement on-board com-

munications and computer technology in order to influence driv-

ers’performance such that the firm’s operational performance is

positively affected.

One challenge management faces in implementing on-board

monitoring technology is that many drivers are not in favor of such

technology (Cantor et al. 2011). Drivers value their autonomy and

consider on-board technology an invasion of their privacy (Swartz

and Douglas 2009; Cantor and Terle 2010). According to the elec-

tronic performance monitoring literature, technological monitoring

of employees is neither good nor bad per se, in that the employee

and organizational outcomes of such monitoring depend on how

the information from such monitoring is utilized (Chalykoff and

Kochan 1989; Aiello and Svec 1993; Alder and Ambrose 2005;

McNall and Stanton 2011). This suggests that the impact of tech-

nology control on organizational performance is likely to be con-

tingent on other types of formal controls.

The expectation that technology control and other formal con-

trols will have contingent effects on firms’operational perfor-

mance is consistent with the driver control framework developed

by Mello and Hunt (2009). The control literature in marketing

on which they ground their framework has a long research tradi-

tion of studying the use of formal controls for monitoring sales-

persons who work outside the direct supervision of management

(Cravens et al. 1993; Oliver and Anderson 1994; Challagalla and

Shervani 1996; Slater and Olson 2000; Evans et al. 2007). How-

ever, in a comprehensive literature review of three decades of

research, Baldauf et al. (2005) find only weak empirical evidence

to support linear relationships between formal controls and firm-

level performance outcomes. As a result, they recommend that

future research examine the contingent effects of formal controls

on firm performance, which is the approach we take in this

study. In doing so, we also extend Mello and Hunt’s (2009) pre-

liminary work on truck driver formal controls.

THEORY AND HYPOTHESIS DEVELOPMENT

The principal–agent problem

Principal–agent relationships are ubiquitous in organization the-

ory (Sharma 1997), both at the organizational level between cus-

tomers and suppliers (Bergen et al. 1992; Rungtusanatham et al.

2007), and at the intraorganizational level between employers

and employees (Husted 2007). In agency theory, we assume that

both parties seek to maximize their utility under conditions in

which the principal’s goals and the agent’s goals are misaligned

(Eisenhardt 1989). In the management–driver setting, incongruent

goals are evident when, for example, drivers take longer breaks

than mandated by management and then make up for lost time

by speeding (Hubbard 2000). Given goal incongruence, the

302 J. W. Miller et al.