The Interplay of Relational Governance and Formal Control in Horizontal Alliances: A Social Contract Perspective

• Author: Thorsten Schäffler,Carl Marcus Wallenburg
• DOI: http://doi.org/10.1111/jscm.12041
• Date: 01 April 2014
• Published date: 01 April 2014

THE INTERPLAY OF RELATIONAL GOVERNANCE AND

FORMAL CONTROL IN HORIZONTAL ALLIANCES: A

SOCIAL CONTRACT PERSPECTIVE

CARL MARCUS WALLENBURG AND THORSTEN SCH

€

AFFLER

WHU—Otto Beisheim School of Management

Governance is critical to an alliance relationship as it aids in curbing

opportunism and thus in achieving higher performance. While research

suggests relational governance as well as formal control mechanisms as

viable means to reduce opportunistic behavior in an alliance relationship,

the effectiveness of the interplay of these governance forms remains an

important issue. This research addresses this challenge by applying social

contract theory to resolve the uncertainties surrounding whether relational

governance, exercised by joint actions in the performance measurement

process (PMP), can be effectively complemented by the formal control

mechanisms of output and process controls. Based on a survey of 197

horizontal alliances of German logistics service providers and using struc-

tural equation modeling, we find that if formal control mechanisms are

legitimized by underlying agreements, which are established through rela-

tional governance (i.e., joint actions), the two governance forms indeed

complement each other. However, if no such legitimization through social

contracts is present, the complementation is counterproductive. Further-

more, it is shown that opportunism in the setting of horizontal alliances

is also detrimental to alliance success.

Keywords: partnering (alliances); performance measurement; social contract theory;

relational governance; structural equation modeling

INTRODUCTION

Over the last two decades, a trend toward more

cooperative ventures has emerged, with many

companies, especially in the logistics sector, active in

one or more horizontal alliances (Cruijssen, Cools &

Dullaert, 2007a; Cruijssen, Dullaert & Fleuren, 2007b;

Das & Rahman, 2010; Schmoltzi & Wallenburg,

2011). The factors behind this trend are multifaceted

and include aspects such as increased competition,

a greater need to provide products and services on a

regional or global basis instead of focusing only on

local customers, and requirements to make larger

investments in supply chain assets (e.g., IT systems).

Given these factors, partnering with other companies

at the same level of the value chain can yield competi-

tive advantage. The motivations for companies to

enter horizontal alliances are diverse, ranging from

the desire to acquire additional competencies and to

increase market penetration to goals related to

improving service quality and productivity (Cruijssen

et al., 2007a,b; Hofenk, Schipper, Semejin &

Gelderman, 2011; Schmoltzi & Wallenburg, 2011).

Yet, despite a long history of horizontal alliances,

many fail to meet expectations and are terminated

(Langfield-Smith, 2008); as many as 40 percent to

70 percent of horizontal alliances fail in some indus-

tries (Kale, Dyer & Singh, 2002; Spekman, Isabella &

MacAvoy, 2000; Taylor, 2005), with opportunistic

actions of alliance members often emphasized as the

main reason for failure (Das, 2004; Das & Rahman,

2010). In general, effective alliance management

through the establishment of appropriate governance

mechanisms has been identified as a measure to

reduce opportunistic behavior among alliance

members, which increases the likelihood of success

(Gulati & Singh, 1998; Hoetker & Mellewigt, 2009;

Lee & Cavusgil, 2006; Schmoltzi & Wallenburg,

2012). The governance mechanisms are “safeguards

Acknowledgments: The authors want to thank Jason Miller from

The Ohio State University for his support in the analysis phase

of this research project and the K€

uhne-Foundation for its gener-

ous funding that made this research possible.

April 2014 41

that firms put in place to govern interorganizational

exchange” to “minimize exposure to opportunism”

(Jap & Ganesan, 2000, p. 230).

Compared with vertical alliances, horizontal

alliances are especially prone to opportunistic behav-

ior due to different idiosyncrasies. First, interdepen-

dence is lower (Rindfleisch, 2000), because horizontal

alliances are not based on a clear buyer–supplier rela-

tionship.

1

Instead of one party being a customer to

others, the alliance members are at the same level of

the value chain. An example for the logistics industry

are logistics service providers (LSPs) operating a joint

transportation network. A second idiosyncrasy is

co-opetition—the simultaneous existence of coopera-

tion and competition among the parties (Das & Teng,

2000b; Wilhelm, 2011; Zeng & Chen, 2003). Addition-

ally, horizontal alliances often are multilateral and

entail three or more firms (Schmoltzi & Wallenburg,

2011).

In horizontal alliances, relational governance has

been shown in prior literature (e.g., Schmoltzi &

Wallenburg, 2012; Steinicke, Wallenburg & Schmoltzi,

2012; Wallenburg & Raue, 2011) to be an especially

important form of governance. It enforces obligations,

promises, and expectations through social processes

that promote relational norms and rely on mutual

adjustment and joint action (Heide & John, 1992;

Poppo & Zenger, 2002). Here, joint action in key

areas of the alliance (Joshi & Stump, 1999) is of vital

importance. One such key area is performance mea-

surement (PM; Bititci et al., 1997). Hence, this

research proposes that joint action in the correspond-

ing performance measurement processes (PMP) is a

means to establish specific social processes and rela-

tional norms, which function as safeguards against

opportunism. Transaction cost economics theory

(TCE) points out that formal control mechanisms also

can mitigate exchange hazards and reduce the risk of

opportunistic behavior (Heide, Wathne & Rokkan,

2007; Poppo & Zenger, 2002; Anderson and Weitz

1992; Williamson, 1985).

This raises the question of whether it is effective to

complement relational governance in horizontal alli-

ances with formal governance mechanisms to

maximize the effect. At first sight such an approach

may appear very promising, because process control

and output control as key elements of formal control

(Jaworski, Stathakopoulos & Krishnan, 1993) could

build on the joint PMP in their monitoring and

evaluation of processes and outputs. However, prior

research does not show consensus in this respect.

While one stream of research clearly outlines the bene-

fits of combining relational governance with formal

control (Cannon, Achrol & Gundlach, 2000; Poppo &

Zenger, 2002), a second stream notes their substitu-

tive or even antagonistic nature in that formal control

may undermine social processes, hamper the forma-

tion of trust, or even breed a situation of mistrust that

instead increases opportunism (Dyer & Singh, 1998;

Gulati, 1995).

The importance of the fundamental question of

whether it is effective or, instead, counterproductive

to complement relational governance with formal

control has been highlighted in a call for research

by Rindfleisch et al. (2010), who postulate that

further investigations with respect to governance in

alliances should be undertaken and that this research

should particularly focus on the application of more

than one form of governance. This call was later

reinforced by Gelderman and Vermeulen (2012),

and yet, few researchers have taken steps toward

responding.

This article addresses this research gap and outlines

how the nature of the interplay between different

forms governance is affected by answering the ques-

tion of whether formal control is legitimized, namely

by the social contracts inherent to the alliance, or not.

The idea of social contracts have a long history and

can be traced back to social and political upheavals in

Europe more than 300 years ago (Dunfee, Smith &

Ross, 1999). On the micro level viewed in this

research (i.e., the interfirm level in contrast to the

societal level viewed in early works) social contracts

relate to the explicit or implicit agreement on what

each party is entitled to. While social contracts are not

legally binding and only refer to the common under-

standing, they on the one hand outline what rights

and obligations exist and on the other hand give pro-

tection against illegitimate action. Specifically, this

article builds on social contract theory (Dunfee et al.,

1999) and the work of Heide et al. (2007) in outlin-

ing that legitimization for or against formal control

will be embedded in the relational setup and the spe-

cific forms of joint action.

This focal aspect of the research—the interaction

between relational governance and formal control—is

complemented with two further contributions: Build-

ing on TCE, this research is the first to outline and

test the specific effects that joint action in the PMP

has in reducing opportunism in horizontal alliances

and, further, the positive effect that reducing oppor-

tunism has on alliance performance. To test the corre-

sponding hypotheses, an empirical methodology is

applied using data from 197 horizontal alliances of

German LSPs. With that, the goal is to enhance the

theoretical understanding regarding the functioning of

different governance forms and the effectiveness

of their interplay for reducing opportunism and

increasing alliance performance.

1

Consequently, subcontracting relationships are not viewed as

horizontal relationships.

Volume 50, Number 2

Journal of Supply Chain Management

42