Inter-organizational power

Inter-organizational power plays a pivotal role in the management of inter-firm relationships.

A number of research studies address the issue of inter-firm power (e.g. Belaya, Gagalyuk, &

Hanf, 2009). According to the framework of Dwyer et al. (1987), inter-firm power operates closely with bargaining processes in the exploration and expansion phase. Inter-firm power is brought to bear on bargaining, both in the exploration phase and in day-to-day commitment, in the hope that concessions or resources, which exchange partners require, will be granted or obtained. However, exercise of unjust power sources may lead other exchange partners to terminate the association when interdependencies are minimal. The effect of power is a crucial topic for both managers and academics. The purpose of this chapter is to provide the theoretical background of this concept.

2.2.1. What is power?

There are many conceptualizations of power. One of the fundamental determinants of power, according to sociologists, is dependence. Emerson (1962) suggests that the power of A over B is equal to and based on the dependence of B on A. Power is not an attribute of the actor but a property of the social relation. Many researchers adopt Emerson’s conceptualization and adjust it to their research context. For example, Dwyer (1984) states that dependence and power “rests on the extent to which Bis dependent on Afor valued resources” (p. 682).

A research review of the definition of power leads to the conclusion that a firm has power over its partner firm when its partner firm perceives that the firm has expertise, information, attractiveness, a right to prescribe the partner firm’s behaviour, or the ability to mediate

punishments and rewards for the partner firm (e.g., French & Raven, 1959; Pfeffer & Salancik, 1978; Wilkinson, 1979; Gaski & Nevin, 1985; Gaski, 1986; Scheer & Stern, 1992).

Alternatively, a partner firm is dependent on a firm when a firm possesses valued resources, such as capital, products, services, information, or status (Dwyer et al., 1987; Scheer & Stern, 1992) that create partner firm rewards and benefits that are not easily replaced.

2.2.2. Factors influencing power

Heide and John (1988) suggest four factors that influence power or dependence.

First, dependence is increased if the outcomes obtained from a relationship are important or highly valued or if the exchange magnitude itself is high (i.e., a firm provides a large fraction of partner firm’s business). This is consistent with the “sales and profit” approach developed by El-Ansary and Stern (1972). In that approach, the greater the percentage of sales and profit contributed by a firm, the greater a partner firm’sdependence on a firm. Many previous studies use the importance or magnitude of exchange to explain the dependence of firms (e.g., El-Ansary & Stern, 1972; Etgar, 1976; Pfeffer & Salancik, 1978; Dickson, 1983).

Second, if outcomes obtained from a relationship are higher or better than outcomes obtained from alternative relationships, dependence is increased. Previous studies use role performance or comparison of outcome levels as the basis of dependence (e.g. Frazier, 1983b; Anderson &

Narus, 1984). The concept of role performance, developed by Frazier (1983a), refers to how well a firm fulfills its role in a relationship with its partner firms.

Third, dependence is increased if there are fewer alternative exchange sources. The concentration of exchange or the fraction of business done with a particular partner firm are factors that arise from previous empirical and conceptual studies (e.g., El-Ansary & Stern, 1972; Etgar, 1976; Pfeffer & Salancik, 1978; Dickson, 1983).

Fourth, if there are fewer potential alternative sources of exchange available for replacing a partner firm, it is difficult for a firm to substitute another partner. Dependence is therefore increased. Previous empirical studies use the replaceability of the incumbent partner as a measure of dependence (e.g., El-Ansary & Stern, 1972; Etgar, 1976; Brown, Lusch, &

Muehling, 1983; Buchanan, 1992).

2.2.3. Power base

Extant research studies of power share (1959) the power typology developed by French and Raven ((1959). According to this view, power exists in six forms: reward power, coercive power, legitimate power, referent power, and information power. Each form of power is defined by its ability to bring tangible or intangible consequences into use for a target.

Reward powerrefers to the granting of consequences that a receiving firm regards as desirable, or the withdrawal of consequences that a receiving firm considers as aversive. The use of non-coercive power may take considerable time to implement effectively (Kasulis & Spekman, 1980; Frazier & Summers, 1984). A firm that uses non-coercive power can expect the return use of non-coercive power from its exchange partners, contributing to a supportive exchange atmosphere (Frazier & Rody, 1991).

Coercive poweror punitive powerrefers to the granting of aversive consequences, or penalties, as well as the withdrawal of desirable consequences (Hinkin & Schriesheim, 1989). A firm might possess destructive resources that can wound partner firms (Molm, 1989). When a firm intentionally inflicts damaging consequences on itspartner, the act is defined as punitive action (Lusch, 1976; Gaski & Nevin, 1985). Kumar, Scheer, and Steenkamp (1998) dissect punitive action and use the term “punitive capability” (p. 226) to explain the firm’s ability and willingness to deliver negative consequences to its partner. The firm might develop its punitive capability by investing in the systems that control the withdrawal of valued resources or exercising destructive resources and having the will to deliver negative consequences to its partner.

Legitimate poweroccurs when a firm is perceived to have a right (i.e., a legitimate right), to influence its partner firm, when the partner firm is obligated to comply with this influence.

There may not be any granting of direct consequences involved. Legitimate power can be divided into two types: traditional legitimate and legal legitimate (Kasulis & Spekman, 1980).

The former refers to the perceived hierarchies in which stronger firms may feel they have legitimate power and consequently can influence certain policies (Stern & El-Ansary, 1977);

the latter is based on contractual agreements that all exchange partners make to govern their collaboration, such as franchising agreements between franchisors and franchisees (Stern &

El-Ansary, 1977).

Reference power is based on a firm’s desire to be closely associated with its partner. Some firms pride themselves on being associated with certain partner firms or brands. Such firms are willing to be influenced by their partners.

Expert poweroccurs when a firm perceives that its exchange partner is knowledgeable about a certain area, and allows its exchange partner to influence its decision and behaviours.

A firm has information power over its partner firm when it has the ability to (a) provide information that was previously unavailable to its partner and (b) interpret existing information to be meaningful but yet unknown by its partner (Raven & Kruglanski, 1970).

2.2.4. Contingency of power effect

Positive and negative effects can occur either contingently or non-contingently. Contingent influence occurs when a firm promises or threatens to signal explicitly that it will mediate positive or negative consequences, depending on the response of its partner firm. Non-contingent influence occurs when a firm mediates consequences for its partner unilaterally in the hope that its partner will subsequently behave in the way sought by the firm; the firm exercises resources before its partner complies (Scheer & Stern, 1992).

2.2.5. Power structure and its relation to research questions

Two types of inter-firm relationships can be identified: symmetric-power relationships and asymmetric-power relationships. Power symmetry occurs when both partner firms have the same degree of power; power asymmetry occurs when partner firms have different degrees of power. This power structure affects behaviours and attitudes of firm managers toward their partner firms. (Bacharach & Lawler, 1981; Lawler, 1986). Bilateral deterrence theory (a sociological theory), ably explains the effects of interdependence of exchange partners. It views asymmetric-power relationships as unstable, consistent with extant research findings that show that asymmetric relationships are less stable and less beneficial than symmetric relationships (e.g., Buchanan, 1992; Kumar et al., 1995).

A firm with relatively high power (a stronger firm)is expected to exploit its weaker partner by frequently using coercive power (Bannister, 1969; Robicheaux & El-Ansary, 1975). A firm with relatively low power (a weaker firm), lacking alternatives and status, is prone to have high tolerance for the use of coercive power by its stronger partner and to have minor equity concerns. A weaker firm, therefore, does not (or barely attempts) to retaliate (Bucklin, 1973;

Blalock & Wilkin 1979). A firm with high power due to the availability of alternatives and status levels has a low level of tolerance for the use of coercive power (Frazier & Rody, 1991).

Many previous empirical studies have shown that the possession of power encourages a firm to act opportunistically by unfairly gaining a share of profit from an exchange (e.g., Roering,

1977; Wilkinson & Kipnis, 1978; Dwyer & Walker, 1981; Kale, 1986; McAlister, Bazerman,

& Fader, 1986; Frazier et al., 1989; Frazier & Rody, 1991).

A stronger firm is likely to be able to utilize non-coercive strategies effectively, as it has the prerequisite time and attention from its exchange partner; a weaker firm is likely to be forced to use coercive power more frequently to make its presence felt and demands known, though its effort might be ineffective (Emerson, 1962; Frazier & Rody, 1991).

In line with previous research, this study takes the position that inter-firm power plays a key role in inter-firm relationships. In particular, itshares the view of Heide and John (1998) that power structure influences a firm’s ability to choose or design governance mechanisms. It is not always possible for firms to establish the desired mode of governance. Firms need to consider their own power in addition to assessing the transaction dimension. By accounting for power structure, the TCE framework will be completeand will be able to explain all types of firms. Hypotheses based on this logic are developedin Chapter 3.