Managerial implications

From a management point of view, this research provides insights on appropriate strategies for managers who aim to form and coordinate inter-firm relationships. It argues that managers should consider the characteristics of their inter-firm power and negotiation strategy. In this section, there are some guidelines suggesting how to approach this matter. Section 7.3.1 discusses why power structure is important, and how it effects TCE. Section 7.3.2 discusses why negotiation is important and identifies its role in implementation of market positioning strategies.

7.3.1. Power asymmetry in buyer-supplier relationships

Asymmetric-power relationships between partner firms involve interactions between stronger and weaker firms. This relationship is observable, since one firm is dependent on its partner firm. On one side, asymmetric power encourages stronger firms to behave opportunistically toward their weaker partners. This hinders the development of effective buyer-supplier relationships. On the other side, power provides stronger firms with an effective tool to coordinate and promote fruitful relationships.

It is an advantage to acknowledge that asymmetric-power relationships have a moderating effect on TCE. Empirical results from this study found that specific investments made by stronger firms have no association with hierarchical governance. This suggests that stronger firms may be able to reduce transaction costs and manage relationships with their weaker partner firms without hierarchical governance. This finding lends support to the contention of Shervani et al. (2007) that managers should evaluate their firm’s power before making the forward channel integration. Firms with high power can handle hazards associated with using market governance when specific investments and uncertainty are high. Although exchanges are organized within a market governance structure, stronger firms are likely to be able to exercise legitimate authority, monitor behaviour, and offer effective incentives by influencing weaker firms’ decisions on, for example, prices, terms, amount of information, and work activities. This helps stronger firms avoid the high cost of hierarchical governance.

With regard to weaker firms, empirical results from this study support the contention that specific investments made by weaker firms are positively related to formalization. This lends support to the common tenet of TCE. Weaker firms may not be able to reduce transaction costs through market governance; therefore, they are motivated to adopt formalization, when rules are specified, to reduce transaction costs.

With regard to relational governance, asymmetric-power relationships have been found to have a moderating effect on the relationship between specific investments and relational governance.

Weaker firms may be able to handle transaction hazards and manage relationships with their stronger partner firms without relational governance. This finding, combined with the results from testing of the same model, shows that when weaker firms make specific investments, they tend to safeguard these investments by relying on formalization. For weaker firms, relational governance as a non-juridical mechanism does not have sufficient safeguarding capability.

In contrast, empirical results from this study found that specific investments made by stronger firms are positively related to flexibility. This may lend support to the finding of this study that stronger firms do not choose to use hierarchical governance, but rather use the norm of flexibility and their power to safeguard their specific investments.

7.3.2. Negotiation strategies, governance structures, and implementation of market position strategies

Partner firms commonly communicate or negotiate with one another to reach agreement. Many previous studies support the contention that problem-solving strategy positively influences a firm’s profits and satisfaction (e.g., Clopton, 1984; Ganesan, 1993; Graham, 1986; Pruitt, 1981). However, empirical results from this study found mixed results when problem-solving negotiation strategy interacts with governance structure.

The first result, as expected, is that there is a positive interaction effect between centralization and problem-solving negotiation strategy on end-product enhancement outcomes, while neither centralization or problem-solving negotiation strategy have any effect on end-product enhancement outcomes. This suggests that in inter-firm relationships characterized by a high degree of authority (where one firm can impose decisions on another firm), problem-solving negotiation strategy may enhance end-product enhancement outcomes (Ghosh & John, 2005), i.e., the joint net gains from increased customer utility delivered by the end product. This finding is essential, because centralization alone or problem-solving strategy alone may not be able provide firms with end-product enhancement outcomes.

A practical recommendation of this finding is that managers of supplier firms who wish to achieve a differentiation advantage relative to their competitors should identify dominant parties within their customer firms who may be ableto impose decisions on other parties. With regard to such dominant parties, managers should place high importance on both relationship and end-product enhancement outcomes. Firm managersmust take into account mutual interest when interacting with their partners and jointly developing and adopting mutually beneficial agreements. With this approach, supplier firms may retain their goal of differentiation advantage.

The second finding is contrary to expectation. Empirical results from this study found a negative interaction effect of information exchange and problem-solving negotiation strategy on end-product enhancement outcomes; information exchange has no effects on these

outcomes, but problem-solving strategy has positiveeffects on theses outcomes. These results suggest that information exchange reduces the positive effect of problem-solving negotiation strategy. When problem-solving negotiation strategy is applied, the norm of information exchange may reduce the expected positive results of this negotiation strategy on end-product enhancement outcomes.

In practice, if the goal of supplying firms is to achieve a differentiation advantage, managers of supplying firms should first identify whether they use problem-solving negotiation strategy, (which secures the best results for their own side while maintaining positive long-term working relationships), to achieve agreements on exchange conditions. If so, they should exchange information with partner firms with caution. Information exchange is found to hinder the positive results from problem-solving negotiation strategy on reaching the goal of differentiation advantage. Although information exchange can mitigate opportunism and safeguard specific investments, it hinders a firm’s opportunity to attain its goal of differentiation advantage through problem-solving negotiation strategy.