Intermediary manager's prefered relationship management approaches for the exporter-intermediary relationship : the role of internal organization and personal characteristics

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INTERMEDIARY MANAGER’S PREFERED RELATIONSHIP

MANAGEMENT APPROACHES FOR THE

EXPORTER-INTERMEDIARY RELATIONSHIP: THE ROLE OF INTERNAL

ORGANIZATION AND PERSONAL CHARACTERISTICS

Master Thesis

MSc. Business Administration – International Management Track Supervisor: Dr Johan Lindeque

Second reader: Dr Michelle Westermann-Behaylo Student: Laura Mikalauskaite

Student ID: 10638318

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Abstract

This study presents new insights on relationship management approaches preferred in exporter-intermediary relationship from the intermediary manager’s point of view and shows that both internal environment in the intermediary firm and the personal characteristics of intermediary managers have an effect on the relationship management approach preferred by the intermediary managers in exporter-intermediary relationship. This thesis finds that more autonomous intermediary managers would prefer the relationship management approaches that grants them more freedom and decision-making autonomy, such as outcome based and relational approaches whereas controlled and audited intermediary managers often prefer to have the same level of control in their relationship with exporter firms and might prefer the behavioural approach to manage the relationship. Furthermore, this thesis finds that motivation of intermediary managers and their age also have an effect on the relationship management approach preferred.

Keywords: exporter, intermediary, approaches to control, personal characteristics, internal

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Statement of Originality

This document is written by student LAURA MIKALAUSKAITE who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Acknowledgements

I would like to thank my supervisor Johan Lindeque for always believing in my capabilities, for his support, words of encouragement, time and especially patience throughout this whole difficult thesis process. Without his guidance and motivational words I would not be able to deliver the quality that I am delivering now.

Furthermore I would like to thank all my friends for always being there for me and cheering me up when needed.

Lastly, I would like to thank my parents and sister for constant support, encouragement and, most importantly, for dealing with my mood on these critical days when nothing went my way. Without your support, I would never be able to accomplish what I have accomplished now.

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Index of Tables and Figures

Table 1: Overview of selected intermediary firms ... 32

Table 2: Interview questions and their matching working propositions ... 37

Table 3: Results Case 1 ... 45

Table 6: Results cross-case analysis ... 61

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1. Introduction

In the third quarter of 2016 foreign direct investment (FDI) in Lithuania amounted to €17.3 million. For that same period imports in Lithuania were reported to have reached €2091.2 million (Tradingeconomics, 2016). While the difference is staggering, these figures only reflect a well-known fact that firms wanting to engage in cross-border trade and enter transition markets such as Lithuania, most often do so through non-equity entry modes such as exporting (Ginevičius & Tvaronavičiene, 2005). The reasoning behind such statistics lies in the history of Lithuania and other similar Baltic countries. On the one hand, transition countries such as Lithuania and other Baltic countries are receiving increasing attention from foreign firms as destinations for market entry ever since they became independent (Ginevičius & Tvaronavičiene, 2005). In addition to that, the fact that these countries are heavily influenced by the global economy and depend on resources from abroad (Nikula & Kotilainen, 2012) made it crucial for them to adopt rather favourable laws for foreign investors. However, on the other hand, the bureaucratic difficulties, unstable legislative base and high levels of corruption embedded in these countries because of their history decrease the willingness of foreign firms to commit their resources, which leaves exporting as the most viable mode of entry (Ginevičius & Tvaronavičiene, 2005). Consequently, since exporting is still the most attractive mode of foreign market entry (FME) in transition countries such as Lithuania, it is a topic that should receive significantly more attention. Thus, this study aims to contribute to this understudied field in the international business (IB) literature.

Once the decision to enter a foreign market through non-equity entry mode is made, the issue whether to export to foreign market directly or through export intermediary arises (Pan & Tse, 2000). While literature in international trade has largely focused on direct export (Cavusgil & Zou, 1994; Gao, Murray, Kotabe, & Lu, 2010), emerging body of research has

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8 emphasized the existence of producers that export indirectly and the role played by intermediaries facilitating exports (Bernard, Grazzi & Tomasi, 2015). Many scholars have agreed that in cases when firms have limited knowledge about the specific market prior to entry, indirect exporting through local export intermediaries can help avoid some of the risks associated with uncertainty and help enter the market more efficiently and at lower costs (Rambocas, Meneses, Monteiro & Brito, 2015; Shipley, 1984; Solberg & Nes, 2002). Vast majority of studies regarding indirect exporting have taken a standpoint of the exporter firm and focused on intermediary selection, intermediary performance evaluation, intermediary relationship termination (Cavusgil, Yeoh, & Mitri, 1995; Peng & York, 2001; Rambocas et al., 2015; Shipley, 1984). Other studies in the field have studied different approaches that exporter firms can implement to govern the intermediaries since exporter-intermediary relationships are hard to coordinate and high performance is difficult to achieve (Bello & Gilliland, 1997; Mortanges & Vossen, 1999). However, studies that focus on the exporter-intermediary relationship from the standpoint of the exporter-intermediary firm are quite rare in the IB literature. In equity entry mode literature scholars have noticed the importance of subsidiary managers in the parent-subsidiary relationships, thus many studies focus on subsidiary control approaches and how subsidiary managers can help increase the contributory role and performance of the subsidiary (Birkinshaw, Hood & Jonsson, 1998; Monteiro, Arvidsson & Birkinshaw, 2008; Mudambi & Navarra, 2004).

Studies concerning the exporter-intermediary relationship agree that the best performing intermediaries are usually the ones that can minimize the agency costs for their exporter firm clients (Peng & York, 2001). Intermediary firms can achieve this by ensuring best performance of the intermediary managers, which is connected to the internal organization of the intermediary firm (Davis, Schoorman & Donaldson, 1997). An assumption can therefore be made that the intermediary firm’s governance approach used to

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9 minimize the agency risks internally by either: a) granting intermediary managers with autonomy (stewardship approach) or b) bounding them with guidelines, audits and control (agency approach), has a direct effect on the control approach established between the intermediary firm manager and its exporter firm client. Thus the purpose of this study is to take on an intermediary manager’s perspective in the exporter-intermediary relationship and to determine how the internal environment in the intermediary firm and personal characteristics of the intermediary manager affect the relationship management approach that is established between the exporter firm and the intermediary firm. The research question for this thesis is thus as follows:

RQ: Why do export intermediary managers prefer specific approaches to the management of

exporter-intermediary relationships?

While the IB literature has widely focused on parent-subsidiary relationships and how initiative of subsidiary managers affect those relationships (Birkinshaw et al., 1998), little attention has been given to the intermediary managers and their role in establishing the relationships between the intermediary firm and their client exporting firms. Recent study done by Laufs, Bembom & Schwens (2016) discusses the fact that personal characteristics of managers have an impact on the way they make decisions, therefore personal characteristics, such as age, motivation or experience of intermediary managers should be taken into account when analysing the relationship between exporter and intermediary firm. All in all, non-equity exchanges have become increasingly important (Gençtürk & Aulakh, 2007; Ngo, Janssen, Leonidou & Christodoulides, 2014), therefore analysing the exporter-intermediary relationship with intermediary manager at the forefront and understanding intermediary manager’s reasoning behind different relationship management approaches preferred in order

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10 to facilitate long-term partnerships are crucial. Unfortunately, existing research has neglected the analysis of how personal characteristics of intermediary managers can affect the relationship management approach established between these intermediary managers and their export firm clients.

This study attempts to explain the reasoning behind different management preferences of intermediary managers in the exporter-intermediary relationship. To answer the research question, the focus of this study will be on Lithuanian intermediary firms and their managers. As already mentioned, Lithuania is a country, where exporting, as a choice of market entry, highly exceeds FDI (Tradingeconomics, 2016). Therefore, Lithuanian intermediary firms and their managers are suitable as the embedded unit of analysis for this research. The intermediary firms have been selected on the basis of their length of operation, their sector specificity and their client base. Relationship management approaches in this study are expressed as preferences of intermediary managers for different relationship management mechanisms – relational or outcome control approach at one end of the continuum and behaviour-based control mechanism at the other end (Mortanges & Vossen, 1999).

The study is conducted by using multiple case study research design (Eisenhardt, 1989) and is based on three cases with two embedded units of analysis. Each case is individually analysed and then compared with other cases in a cross-case analysis. Primary qualitative data for this study has been gathered through semi-structured interviews with six managers, after which interview transcripts were analysed in software program Nvivo using thematic coding (Attridge-Stirling, 2001).

The methodology section is followed by the individual analysis and the cross-case analysis of the cases where the findings of the analysis are presented. The analysis shows support for the idea that internal environment in the intermediary firm affects the relationship management approach preference of the intermediary manager. The analysis of personal

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11 characteristics of intermediary managers shows that motivation of managers and their age can also affect the preferred relationship management approach in the exporter-intermediary relationship. These findings are explained in more detail in the next sections of the study. The study proceeds by setting the scene with existing literature review regarding the foreign market entry (FME) modes and exporting. This paper also reviews literature on intermediary selection, approaches to intermediary control, agency and stewardship theories and organizational environment of intermediary firms as a background for interpreting intermediary manager’s role in exporter-intermediary relationship. The following section focuses on theoretical framework where working propositions are established in order to understand why intermediary managers prefer different relationship management approaches in the exporter-intermediary relationship. The following sections include methodology for data collection, data analysis, discussion and conclusion.

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2. Literature review

The literature review introduces the exporter-intermediary relationship specifics and discusses connected core International Business (IB) concepts that are central to this study of how intermediary manager’s personal characteristics affect the relationship management approach preferred in the exporter-intermediary relationships. These core concepts include foreign market entry modes (Pan & Tse, 2000), exporting (Gao et al., 2010), parent-subsidiary relationship (Birkinshaw et al., 1998) as well as theories of stewardship and agency (Donaldson & Davis, 1991). The focus will then shift to the different control approaches possible for the exporter-intermediary relationships (Mortanges & Vossen, 1999) and will analyse how personal characteristics of intermediary managers (Manz, 1986; Shipley, 1984; Yim, 2013) might affect the relationship management approach preferred for said relationship. Next, literature discussing internal environment in the intermediary firm is presented, which is then followed by literature about manager’s age, motivation and experience and, finally, different types of relationship management approaches as a result of intermediary manager’s characteristics are discussed.

Globalisation can be explained as integration of markets of goods, services and capital in an international arena (Garrett, 2000). While there is a lack of empirical knowledge in international business (IB) research about the actual level of globalization, many can agree that globalization is changing the world rapidly, radically and in ways that may be profoundly disruptive (Garrett, 2000; Rugman, Verbeke & Nguyen, 2011). The international economic activity has been growing significantly within the past 30 years as domestic markets became saturated and increasingly competitive, which left firms looking for opportunities for international expansion in foreign markets (Gao et al., 2010; Garrett, 2000). Growing international economic activity has shifted IB research focus and promoted foreign market

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13 entry (FME) mode research that gained momentum with about 100 empirical studies published between 1992 and 2007 (Brouthers & Hennart, 2007). The constantly increasing research in the field of foreign market entry modes is a consequence of a well understood fact- a suitable mode for entering the host country’s market is one of the most critical strategic decisions a firm makes when seeking to internationalize, consequently determining the risks that the firm will have to bear in the host country (Laufs et al., 2016). While top management is responsible for most strategic decisions regarding market entry, the execution and implementation of these decisions usually depends on the operational managers of the firm. Studies show that personal characteristics of decision making managers usually impact the decisions made and have an effect on the outcomes of these decisions (Laufs et al., 2016), therefore analysing the managers and how their personal characteristics impact the decisions made for different business activities is crucial.

2.1 Foreign market entry (FME) mode choice

According to Buckley & Casson (2009), previously the FME decision has been analysed as a simple choice between exporting and foreign investment. However, as interest in the field grew, new models describing managerial decisions of market entry mode have emerged as well. Internationalization process model of a firm as proposed by Johanson & Vahlne (1977) notes that firm’s involvement in international markets occurs incrementally: from export to sales subsidiaries to manufacturing facilities. Hierarchical model of market entry modes as proposed by Pan and Tse (2000) outlines different choices that managers have to make in different levels of entry mode hierarchy. The authors claim that entry modes can first be viewed as equity-based versus non-equity-based, which then, in the second level of decision making separate into wholly owned operations versus equity joint ventures in the

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equity-14 based approach, and into choosing between contractual agreements and exporting in the non-equity-based approach. Equity modes are distinguished as ones that require on-going direct management of establishment and constant interaction with various local parties (Brouthers & Hennart, 2007), while non-equity modes do not require the establishment of independent organizations and the relationship between parties can be specified and fixed in the contract (Pan & Tse, 2000).

Non-equity entry mode is regarded as the quickest and easiest way for firms to penetrate foreign markets and engage in internationalization. It requires fewer organizational resources, provides greater flexibility for managerial actions and involves lower business risks than other modes of entry (Gao et al., 2010). In the case of exporting, managers face two channel options: (1) export directly to customers abroad or, (2) export indirectly with the help of an intermediary. While the relationship between parties can be specified in the contract between the exporter and the intermediary, the emerging literature on such relationships make it obvious that this decision is just as important and complicated as the ones arising from equity based entry modes and should not be understudied (Hessels & Terjesen, 2010; Peng & York, 2001; Shipley, 1984). Many previous studies on non-equity entry modes chose to focus on the evaluation of performance of entry and did not evaluate how characteristics of managers in the intermediary firm contributed to the conditions and the success of the entry (Gao et al., 2010; Ngo et al., 2014).

The common theme in the limited literature available that puts managers at the forefront of the study is the evaluation of relationships between two parties - the home country managers and host country managers. In the equity-based foreign market entry modes the relationship studied most is the parent-subsidiary relationship (Birkinshaw et al., 1998; Monteiro et al., 2008; Mudambi & Navarra, 2004) while, in the non-equity entry modes, literature focuses on the relationship between home country exporter and the host country

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15 intermediary (Cavusgil, Deligonul & Zhang, 2004; Gençtürk & Aulakh, 2007; Solberg & Nes, 2002). This study focuses on the later one.

2.2 Exporting as Entry Mode

Many different studies and researchers describe exporting as the easiest way to enter a foreign market since it requires little resource commitment and the conditions of entry can be predetermined in the contract before the actual entry (Gao et al., 2010; Pan & Tse, 2000). On the other hand, contradicting studies report that exporting is also an entry mode that struggles to provide the exporting firm with control over development and performance (Solberg & Nes, 2002) of the foreign market entry as main activities (sales, procurement, distribution, customer relations) (Hessels & Terjesen, 2010) are delegated to the local intermediary (Bello & Gilliland, 1997). The article by Bello & Gilliland (1997) proposes a view that is contrary to the common belief about the easiness of entering a market through non-equity modes and states that most of the foreign intermediary contracts studied have been terminated while the ones remaining were failing to increase export sales performance.

The same article also proposes that relationships with intermediaries are hard to coordinate and high performance is difficult to achieve (Bello & Gilliland, 1997). In general, exporting through intermediary is associated with: a) benefits- as a result of reduced risk, uncertainty and certain costs connected with operating abroad, as well as, b) risks- coming from lack of control that is associated with using export intermediaries (Hessels & Terjesen, 2010). In order to avoid and / or minimize the risks associated with using an intermediary and to build proper long lasting relationships with their intermediaries, exporting firms tend to develop certain practices and ways of doing things (Solberg, 2008). However, the issue arises as a result of the fact that all intermediary firms cannot and should not be treated in the same manner: personal characteristics of intermediary managers have an impact on the way

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16 decisions are made, as they are bounded by context, experience, environment and personality when making decisions (Laufs et al., 2016). Therefore, relationships between exporting firms and intermediary firms should be differentiated according to different managerial contingencies of intermediary managers (Solberg, 2008).

From the findings of the researchers mentioned above a number of common important issues can be established: 1) the first and most important thing for successful market entry via exporting is finding the right intermediary since a channel of distribution is as strong as its weakest link and dependence on a mediocre channel may place an exporter at a serious competitive disadvantage or it might even ruin an entire marketing and entry strategy (Shipley, 1984), 2) to establish a fluent exporting channel it is important to understand the personal characteristics of the intermediary manager and adjust the relationship according to those characteristics (Solberg, 2008), 3) when an intermediary firm is selected and the personality characteristics of the intermediary manager are understood, it becomes imperative to establish the right relationship management that are best suited for that specific relationship. The following chapters are going to analyse these three issues further.

2.3 Exporting Intermediary Selection

Whether or not the exporting firm will be able to achieve its targets depends to a great extent on how well the exporter firm has carried out the analysis of which intermediary firm will do the best possible job in a chosen foreign market (Zou, Tseng, Sohn, Song & Gutierrez, 2011). Potential intermediaries might have varying capabilities, needs, philosophies and objectives that might clash rather than complement those of the exporting firm, thus, finding an intermediary that will act in best interest of the exporter and maintaining good relations with intermediary managers are crucial (Cavusgil et al., 1995). According to Shipley (1984), intermediary selection criteria can be divided into three main factors: a) sales and market

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17 factors (most crucial of the three), b) product and service factors, and c) risk and uncertainty factors. The sales and market factors include intermediary firm’s knowledge of the market, market coverage, quality and size of sales personnel and frequency of sales calls, and all the factors associated with the actual human resources in the intermediary firm (Shipley, 1984).

The findings of this research make it clear that the selection of intermediary entails analysis and evaluation of both the intermediary firm as a whole, and, more importantly, the personnel working for the firm in question with primary focus on the managers, who will be responsible for ensuring successful market entry, creating product awareness and maintaining first and continuous contact with their customers (Shipley, 1984). Numerous researchers have introduced different intermediary selection criteria and guidelines (Cavusgil et al., 1995; Shipley, 1984; Zou et al., 2011) to aid exporting firms when making the selection. The personnel of intermediary firm should play a crucial part in this selection, thus, more attention should be given to how intermediary managers and their characteristics can influence the relationship between the exporter and its intermediary. The interest of this thesis lies in the relationship between the exporter firm and its intermediary firm once the intermediary has been selected, and literature in this area is much more scarce.

2.4 Intermediary firm

Intermediary firms are those that undertake to perform all or part of a domestic manufacturer’s (exporter firm’s) downstream value-chain activities such as outbound logistics, marketing, sales and service activities in international markets (Balabanis, 2001). Many exporting firms are highly dependent on their export channel intermediary firms and consequently avoiding conflict and maintaining long-term relationships is often important to exporter firms thus entailing careful management of the channel (Houghton & Winklhofer, 2004). There is a mutual dependence between parties in the exporter-intermediary

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18 relationships as exporter firms depend on intermediaries to perform all contracted activities (Balabanis, 2001) and intermediary firms depend on exporter firms to maintain long lasting relationships in order to continue being their clients (Pedersen, Petersen, & Benito, 2002). Consequently, when entering into the contract between exporter and intermediary firm, both sides have incentives to negotiate the terms that they feel will benefit the relationship (Solberg & Nes, 2002). At the starting position of contract negotiations between exporter firm and intermediary firm, personal characteristics of managers will have an effect on their preferred best management of that relationship (Laufs et al., 2016). The aim of this study is to understand how internal environment of intermediary firm and personal characteristics of intermediary managers bound the intermediary managers when negotiating the preferred relationship management approach for this relationship.

2.4.1 Internal environment

Organization theory has been strongly influenced by the agency theory that claims that top managers in the firm might be conducting rent-seeking behaviour or can be considered as agents whose interests may diverge from those of their principals (Davis et al., 1997). Agency relationship is a contract under which one person/firm (the principal) engages another person/firm (the agent) to perform some service on their behalf, which involves delegating some decision-making authority to the agent. When both parties are motivated by extrinsic forces it is possible that the agent will not always act in the best interests of the principal, but rather in the interests of his own, however the principal can minimize this rent-seeking behaviour by establishing appropriate incentives for the agent and by incurring monitoring costs designed to limit the abnormal activities of the agent (Jensen & Meckling, 1976). Similar to this view, transaction cost theory assumes that individuals are opportunistic and

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19 seek self-interest with guile, therefore the task of the firm is to establish institutional settings that mitigate the hazards and costs of opportunistic behaviour (Osterloh & Frey, 2000).

The problem of opportunism has been studied by a lot of researchers in the equity foreign market entry mode literature with the focus on subsidiaries. For example, Mudambi & Navarra, (2004) investigated the problem of increasing strategic independence of subsidiaries without provoking rent-seeking by subsidiary managers and proposed control structures that multinational enterprise (MNE) could employ to avoid rent-seeking behaviour. The structures proposed involve finding a delicate balance between coordination and incentives, where the main idea is that the incentives must incorporate considerations of extrinsic and intrinsic motivation of the subsidiary managers. Extrinsic motivation is derived from standard utility maximization theory (Manz, 1986). The behavioural view of an organization describes intrinsic motivation as satisfaction of undertaking the activity for its own sake, identification with the firm’s strategic goals, shared purposes and the fulfilment of norms and claims that it can be harnessed to limit rent-seeking behaviour of managers (Osterloh & Frey, 2000). The equity mode literature about opportunism and rent-seeking behaviour can be extended to the main focus of this study – intermediary firm.

For the purposes of this study it is important to understand that intermediary managers are acting as agents in two relationships: the relationship that intermediary managers have with the exporter firms and the internal relationship between intermediary firm and intermediary managers. The management mechanisms used to mitigate the risks of the exporter-intermediary relationship will be described in the next chapters. The main focus of this section is the internal relationship between intermediary firm and its intermediary managers.

Traditional agency theory proposes that within organizations top managers can be regarded as agents while the owners are regarded as principals (Donaldson & Davis, 1991).

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20 Intermediary managers play an important role for the intermediary firm since human factors involved in inter-firm relationships are critical in developing long-term relationships and maximizing relationship outcomes (Alejandro, Souza, Boles, Ribeiro & Monteiro, 2011). Understanding internal environment of the intermediary firm and its approach regarding control and autonomy of the intermediary managers is therefore crucial (Jensen & Meckling, 1976).

Intermediary managers are responsible for the relationships with exporter firms, they negotiate the terms of the contract, are responsible for introduction, marketing and distribution of exporters’ products in a new market and they make the first contact with customers (Shipley, 1984). The intermediary firm needs to impose different control and reward mechanisms so that they can influence the way the intermediary managers are handling such duties and to ensure that the interests of those managers align with the interests of the intermediary firm as a whole (Davis et al., 1997). From the perspective of the agency theory the main governance mechanism used to minimize agency costs and ensure agent-principal interest alignment is governance structure: audits and performance evaluations of managers (Davis et al., 1997). This theory proposes consistent monitoring as a key to minimize agency costs and look out for opportunistic behaviour.

On the other hand, the conflicting stewardship theory claims that managers are motivated to act in the best interests of their principals and want to do a good job and be good stewards, and that inner motivation is not the main driver behind their actions; instead, it proposes that collectivistic behaviours have higher utility than self-serving behaviours, which implies that stewards’ behaviour will align with the interests of his or her organization (Davis et al., 1997). According to this theory, behaviour of the manager is collective, because the steward seeks to fulfil the objectives of the organization (e.g., sales growth or profitability), therefore this theory assumes that there is a strong relationship between success of the

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21 organization and the principals (stewards) satisfaction (Davis et al., 1997). Under this theory, it is assumed that stewards’ autonomy should be deliberately extended to maximize the benefits of stewards because they can be trusted, and that control could be potentially counter productive, because it undermines the pro-organizational behaviour of these stewards and lowers their motivation (Margulies & Argyris, 1965). The stewardship theory suggests that the main variation of performance comes from the issue whether the structural situation in which the manager is located (internal organization) facilitates effective action by the manager, whether the manager can formulate and implement plans for positive performance (Davis et al., 1997).

This issue can be connected with the leadership style that the owners (principals) choose to implement towards intermediary managers (agents) and its effect on intermediary manager’s actions. Research has found, that leadership style is associated with effectiveness of top management and consensus decision making (Flood, Smith, West & Dawson, 2000). This research has distinguished 4 styles of leadership: a) authoritarian- characterized by the use of instruction and non-contingent reprimand, b) transactional- influence via exchange of valued rewards for behaviours, c) transformational- inspiring followers to do more than originally expected and d) laissez faire- avoiding decision making and supervisory responsibility (Flood et al., 2000). This research has found that transformational leadership style is significantly related to team effectiveness and consensus decision-making, therefore, allowing the intermediary managers to do more than is originally intended and giving them autonomy could be considered as a way to improve their effectiveness and reduce agency costs (Donaldson & Davis, 1991; Flood et al., 2000)

In summary, studies agree that the best performing intermediaries are usually the ones that can minimize the agency costs for their exporter firm clients (Peng & York, 2001). Intermediary firms can achieve that by ensuring best performance of the intermediary

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22 managers, which is connected with internal organization of the intermediary firm (Davis et al., 1997). An assumption can therefore be made that the intermediary firm’s governance approach used to minimize the agency risks internally through either: a) granting intermediary managers with autonomy (stewardship approach) or b) bounding them with guidelines, audits and control (agency approach), has a direct effect on the relationship management approach established between the intermediary firm’s manager and its exporter firm client.

2.5 Approaches to control

Previous studies have found that there is a direct link between control exerted on intermediary firms by the exporter firms and achieving objectives (Bello & Gilliland, 1997; Cavusgil & Zou, 1994). In this instance control is viewed as a goal-oriented process with the intention to influence others to act in a way that aligns with objectives established by the organization. Governance theorists have identified unilateral and bilateral approaches that are able to serve as coordinating mechanisms to control export transactions. These approaches reflect management practises that shift the relationship from an arms-length buyer-seller arrangement towards highly coordinated trading relationship (Bello & Gilliland, 1997). It is a well-established fact that it is essential for the exporter firm to provide direction to its foreign intermediary, as often, a major reason for unsuccessful export strategies is a lack of attention or effort by intermediaries that is caused by lack of direction from exporter firms (Bello & Gilliland, 1997). The same view is presented in a study by Solberg & Nes (2002), who state that higher levels of control and involvement reinforce both parties, intermediaries and exporters, in all their activities while at the same time reducing information asymmetry and increasing performance. While different views on importance of control and involvement have been provided, this thesis uses the three approaches, namely outcome based, relational and behavioural, for further analysis. To better manage inter-firm relations and improve the

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23 efficiency and effectiveness of the export channel Mortanges & Vossen (1999) introduced three approaches to intermediary control.

Outcome-control approach is one way of control that exporter firms’ managers can determine the performance of the intermediary (Mortanges & Vossen, 1999). It is a managerial approach that assumes that intermediaries themselves are best able to determine their direction and level of effort necessary to achieve goals. This control approach allows the exporter firm to set the needed targets to pursue, while the intermediary manager then decides how to pursue them. This approach allows maximum intermediary autonomy but provides incentive and responsibility to the intermediary manager for the final results as the intermediary firm is not compensated for its efforts unless and until sales occur (Mortanges & Vossen, 1999). A study done by Peng & York (2001) describes outcome based approach as one where intermediaries take title to the goods from the exporter, thus carrying the financial risk of selling the goods, while at the same time minimizing the control needed as well as the costs associated with control. This approach helps to align the interests for both parties and solve the agency problem.

The next approach to intermediary control proposed by the study of Mortanges & Vossen (1999) outlines standard operating procedures and close supervision as key factors to control intermediary behaviour and performance. This behaviour-based approach assumes that exporters’ managers have a well-defined idea of what they want the intermediary to do and work to ensure that this intermediary behaves accordingly. This particular approach might be useful when intermediary manager is limited by a lack of skills or has little experience in marketing the exporter’s product (Mortanges & Vossen, 1999). This approach is most similar to the regular market governance approach. The behavioural approach indicates that the nature of the relationship should be decided by formal contracts which fully delineate the nature of transactions and clearly define how conflicts and non-performance issues should be

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24 resolved (Cavusgil et al., 2004). While this approach is said to deter opportunism by clearly outlining rewards and punishment in a written agreement, it is also criticized as it signals distrust and, as a result, might prompt the intermediary to engage in opportunistic behaviour by seeking revenge on purpose (Cavusgil et al., 2004).

The last approach to control that the authors discuss states that exporter-intermediary relationship can be organized and managed through cooperative processes that rely on norm-based mechanisms of governance. This relational approach underlines the significance of agreed-upon common norms of expected behaviour by the decision makers of each party in order to achieve the common goals that are of mutual interest and enhance the well-being of the relationship as a whole (Gençtürk & Aulakh, 2007). This approach suggests that by adopting norms and establishing standards of conduct in the export channel, the two parties set ground rules for future exchange and build trust (Mortanges & Vossen, 1999). Similarly, the role of relationships is also described in a research done by Rambocas et al. (2015), who claim that relationships built on satisfaction and commitment are stronger and more resilient to challenges. In line with the abovementioned studies, it is clear that relational approach is encouraging intermediary managers to act as stewards (Gençtürk & Aulakh, 2007).

The authors agree however, that there is no one best way to control the relationship and that the control mechanism used depends to a great extent on the circumstances of the relationship in question (Mortanges & Vossen, 1999). These circumstances arise from a number of factors: a) how the intermediary firm is dealing with the agency issue within the organization: using auditing and control or allowing autonomous decision making and stewardship, b) what the personal traits/characteristics of the intermediary manager that is dealing with the exporter firm are, and c) how much experience the intermediary firm and its manager have in dealing with the products in question. It can be established, however, that the outcome-based and the relational approaches are relatively similar in that they rely on

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25 autonomy and flexibility while the behaviour-based approach relies on strict rules and guidelines (Gençtürk & Aulakh, 2007). Therefore, based on the factors mentioned above firms are likely to adopt either relational / outcome based approach or behavioural approach for the relationship management in the exporter-intermediary relationship.

As a continuation to the research done in this field, this paper underlines that these three circumstantial factors are vital in determining the nature of exporter-intermediary relationship. Inspired by previous studies, the model of this thesis highlights motivation, experience and age of intermediary managers as variables in a model where internal organizational environment and personal characteristics are precursors and relationship management (control) approaches are the outcomes. The remainder of this section will present relevant contributions from these areas and discuss the hypotheses arising from this model.

2.5.1. Organizational Environment

Due to principal-agent problem, firms may choose different control and incentive mechanisms to make sure that their managers behave in the interest of the company (Donaldson & Davis, 1991). Intermediary firms might have straightforward guidelines for managers outlining how to interact with partner exporter firms coupled with frequent check-ups and audits or they might give managers freedom to negotiate the terms that seem suitable and allow them to make autonomous decisions in terms of the management of the relationship with the exporter firm. How the intermediary manager is treated in his parent intermediary firm might have an effect on which relationship management approach will be opted for in the exporter-intermediary relationship. As intermediaries are faced with the risk of exporter-intermediary managers acting opportunistically, they can create an organizational environment, which enforces standard work procedures and auditing, and hence does not allow for much freedom. Therefore, in a company where managers are given autonomy and are allowed to act as

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26 stewards, more variation might be possible, while in an organization where managers are treated as controlled agents, the opportunity for diversification of relationships might not be possible.

WP1. The more flexibility and autonomy intermediary managers have in the intermediary firm, the more likely they are to prefer outcome or relational approaches to relationship management in their exporter-intermediary relationship.

WP2. The more guidelines, audits and control the intermediary managers have in the intermediary firm, the more likely they are to prefer behavioural approach to relationship management in their exporter-intermediary relationship.

2.5.2. Motivation

Motivation is considered as the main distinction between the agency and stewardship theories. The agency theory focuses on extrinsic rewards that are tangible and have a certain measurable value, while the stewardship theory focuses on intrinsic rewards that include opportunities for growth, achievement, affiliation and self-actualization (Davis et al., 1997). Scholars agree that special effort, such as identifying manager’s needs and problems, providing appropriate support to those needs and problems and exercising leadership in a highly motivated team, is needed to motivate intermediary managers (Shipley, 1984). From this research it is clear that personal characteristics of managers play a significant role in their performance at work (Osterloh & Frey, 2000). A manager that is motivated by extrinsic rewards might prefer the controlled approach to work, since it is easier to deduce what is needed to be done to get the reward (Manz, 1986). This type of manager, when establishing

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27 the relationship with the exporter firm, is likely to prefer the relationship management approach that gives him more direct guidelines, rules and objectives to meet with clear rewards associated with their fulfilment. Based on typology proposed by Mortanges & Vossen (1999) the most suitable relationship management approach for such manager would be the behavioural approach.. On the other hand, a manager that is motivated by intrinsic rewards, and is motivated to work towards the greater good of the firm, is likely to enjoy more autonomy as it is necessary for him to have some decision making power. In this instance, given the opportunity, intrinsically motivated managers would more likely prefer to establish relationship management approaches that allow for flexibility and decision making autonomy, such as relational or outcome based approaches (Mortanges & Vossen, 1999).

WP3. If managers regard themselves as motivated by intrinsic rewards, they are likely to prefer outcome or relational approaches to relationship management in their exporter-intermediary relationship.

WP4. If managers regard themselves as motivated by extrinsic rewards, they are likely to prefer behavioural approaches to relationship management in their exporter-intermediary relationship.

2.5.3. Experience

Managers have capabilities such as experiential knowledge, skills and expertise that allow them to handle difficult situations and complex tasks and differentiate them from others (Acquaah, 2012). A study on what factors influence the level and type of control mechanisms used in the exporter-intermediary relationship notes that exporter firms should be sensitive to

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28 intermediary managers’ experience and market knowledge (Mortanges & Vossen, 1999). The experience and skillsets that intermediary managers have could be directly related to the way they are perceived by their employers, partners and clients (Cavusgil et al., 1995). Since exporter firms perform their due diligence when selecting the appropriate intermediary, they are assumed to be aware of the experience that the intermediary firm has accumulated. Additionally, much of the success in the exporter-intermediary relationship depends on the experience level of the intermediary manager; therefore it is extremely important to factor this in when establishing the nature of the exporter-intermediary relationship. The more experience and knowledge intermediary managers have that are relevant to the particular situation in the relationship in question, the more bargaining power they should be given (Mudambi & Navarra, 2004) in customising the relationship management approach in the exporter-intermediary relationship.

WP5. The greater the experience level of the intermediary manager, the more likely he is to prefer outcome or relational approaches to relationship management in exporter-intermediary relationship.

WP6. The lower the experience level of the intermediary manager, the more likely he is to prefer behavioural approach to relationship management in exporter-intermediary relationship.

2.5.4. Age

A manager’s age directly influences his propensity for risk taking and changes his capacity for information processing and analysis (Laufs et al., 2016). With increasing age, managers

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29 become increasingly risk-averse and may be less likely to embrace new ideas as they become more cautious in their decision-making. Another stream of research has found that with increasing age, people increasingly prefer a quiet life, therefore, one can assume that psychological changes that occur as people get older might affect their decision making (Yim, 2013). Additionally, younger people tend to be overly confident (in themselves and their abilities) and may want to accomplish things on their own, implying that younger people may be more prone to self-leadership (Davis et al., 1997). Based on these findings, it could be that the age of the intermediary manager has an effect on relationship management mechanism that he prefers in the exporter-intermediary relationship.

WP7. Young managers are more risk seeking and self-confident, thus, they are likely to prefer outcome or relational approaches to relationship management in their exporter-intermediary relationship.

WP8. Older managers are more risk-averse and self-cautious, thus, they are likely to prefer behaviour approach to relationship management their in exporter-intermediary relationship.

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3. Methodology

This chapter describes the methods used for this study. It starts with a discussion of the research philosophy through the ontological and epistemological point-of-view and moves on to explain the multiple case study design, which is based on the multiple case study approach of Eisenhardt (1989) and Yin (2013). The following part then explains the quality criteria that is associated with multiple case studies and continues with the description of the case selection process. Finally, this chapter then addresses the data collection methods used as well as the data analysis approach.

3.1. Research Philosophy

Research philosophy is the nature of knowledge that is applied for this thesis and what the researcher believes to be the truth (Saunders & Lewis, 2009). When ontology or the nature of reality is concerned, there is an issue raised whether social entities need to be perceived as objective or subjective. The objectivist view sees reality as a concrete and static structure, while the subjectivist approach assumes that reality is a projection of human imagination and is shaped by human experiences (Morgan & Smircich, 1986). In other words, objectivism believes that facts are external and not dependent on the researcher while subjectivism has a contrary view which assumes that facts are created by actors’ perceptions of their existence (Saunders & Lewis, 2009). This thesis will adopt the objectivist view.

Epistemology is concerned with general philosophical assumptions about how we can understand the world (Maxwell, 2009). There are four important paradigms that most research is built on: critical theory, constructivism, positivism and post-positivism (Brannick & Coghlan, 2007). The later two, positivism and post-positivism, rely on assumptions of objective world and assume a scientific approach to development of knowledge (Saunders &

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31 Lewis, 2009). These paradigms are persistent with a deductive approach and accept the idea that humans have bounded-rationality as well as involve the development of a theoretical framework before hypothetical testing through empirical evidence (Brannick & Coghlan, 2007). These grounds are most suitable to answer the research questions of this study; hence, the post-positivism approach has been selected for this thesis.

3.2. Qualitative multiple case study design

Qualitative research usually studies phenomena in environments where they naturally occur and addresses questions about how social experience produces representations of the world that make the world visible (Gephart, 2004). It tries to describe real-life actions in natural, real-life contexts (Yin, 1994). Contrary to quantitative research, which aims to answer the more mechanistic “what?” questions and to draw a representative sample from the whole population so that the results of the sample studied can be generalized, qualitative studies aim to provide understanding of more complex psychosocial issues and are more useful when answering “how?” and “why?” questions (Marshall, 1996). Qualitative research is therefore suitable to analyse the complexities underlying the choice of relationship management approach that is related to exporter-intermediary relationships as well as relevant personal characteristics of the intermediary managers. Qualitative research is the kind of research that could be conducted by using multiple methods and by applying several strategies, however this study uses a case study approach.

The case study approach is generally acceptable when the research tries to answer “how?” or “why?” questions (Yin, 2013). Case study is a research strategy that: “allows the

researcher to retain a holistic, real-world perspective- such as in studying individual life cycles, small group behaviour, organizational and managerial processes…”

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32 (Yin, 1994, p. 14) and where the focus lies on understanding the dynamics present within single settings and can involve single or multiple cases (Eisenhardt, 1989).

This study thus adopts a multiple case study research design based on approaches of Eisenhardt (1989) and Yin (1994) since this approach agrees with objective ontology and post-positivist epistemology of this study. As this thesis aims to understand relationships between variables and is explanatory in nature, it uses a deductive approach of analysing the data collected to test its relevance to theory (Eisenhardt, 1989). In addition, a theoretical framework has been proposed along with several working propositions, which are compelling when trying to allow generalization to theory (Yin, 2013).

Case 1 2 3

Company A B C

Year of Establishment 2014 1993 2014

Number of clients Over 20 Over 30 Over 15

Sector Men’s beauty care &

Accessories

Agriculture Automatic components & Industrial tools Number of employees 5 52 12 Turnover €50-100 K. €5-10 M. €1-2 M. Number of interviews 2 2 2 Age range of interviewees 25-26 32-42 27-28

Length of interviews ≈ 30 min. ≈ 35 min. ≈ 30 min.

Table 1: Overview of selected intermediary firms (Source: Author)

As this thesis aims to explain how different personality traits of intermediary managers have an effect on the relationship management approach preference for the exporter-intermediary relationship, multiple case study approach is a suitable strategy since it allows comparisons

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33 across cases and facilitates analysis of whether the findings are unique to each case or not. The study consists of three cases with two embedded units of analysis. The units of analysis in this study are managers that are working in the intermediary firms and internal environment of the intermediary firms that are analysed by this case. This design is known as multiple case study design with embedded units of analysis (Yin, 2013). Table 1 provides a summary of selected intermediary firms with information regarding their years of operation, number of clients, their main sector of operation, etc. Each case will be analysed individually and then compared in a cross-case analysis.

3.2.1. Quality criteria for the Multiple Case Study

While research that relies on qualitative data, especially case study approach, is more and more commonly applied, it is also criticized for its lack of rigor (Yin, 2013). To avoid quality risks in this research and to increase the rigor and credibility of this study four criteria are carefully followed: construct validity, internal validity, external validity and reliability (Yin, 1994), explained in the following section.

First of all, construct validity refers to the extent to which a study investigates what it claims to investigate and the extent to which the procedure followed leads to accurate observations of reality (Gibbert & Ruigrok, 2010). Two main research actions that help ensure construct validity in the positivist literature are the triangulation of different data sources and establishment of a clear chain of evidence (Gibbert & Ruigrok, 2010). Triangulation refers to the adoption of different angles from which to look at the same phenomenon which, in a case study setting include different sources of data such as interviews, archival sources and observations (Gibbert & Ruigrok, 2010; Yin, 1994). This study gathers primary data from two company related data sources (managers) within each case to allow for data triangulation (Denzin, 1971). Furthermore, construct validity is enhanced by a clear chain of evidence,

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34 which refers to the process of how a researcher goes from his initial research question to the final conclusions, and includes clear explication of data collection procedures as well as discussion of data analysis procedures (Gibbert & Ruigrok, 2010).

Secondly, internal validity or “logical validity” refers to the presence of causal relationships between variables and results and applies to the data analysis phase of the study (M. Gibbert & Ruigrok, 2010). According to Yin (1994) one way to ensure internal validity is to assess whether the research framework for a given study was derived from literature. As theoretical working propositions in this research are based on literature, they provide support for the development of valid cause and effect relations.

Third criterion, external validity or generalizability, refers to: “the belief that theories

must be shown to account for phenomena not only in the setting in which they are studied but also in other settings” (Gibbert & Ruigrok, 2010, p. 714). While case studies do not allow for

statistical generalization, analytical generalization, which refers to the generalization from empirical observations to theory, can be used to ensure external validity (Gibbert, Ruigrok, & Wicki, 2008). One way to ensure external validity is to provide a clear rationale for case study selection to allow the reader to understand the researcher’s sampling choices (Gibbert et al., 2008). Multiple cases allow for comparisons of results within and between cases, thus creating robust theory since working propositions are grounded in various empirical evidence (Eisenhardt, 1989).

Lastly, reliability is defined as the absence of random error, which means that other researchers derive the same insights if they were to conduct the study again (Gibbert et al., 2008). Reliability can be ensured by transparency, which refers to careful documentation and clarification of research procedures (Gibbert & Ruigrok, 2010). In this study reliability is ensured since all data was gathered in case study database, interviews were performed following the interview protocol and all interviews have been either recorded and transcribed

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35 or comprehensive notes of interviews were taken when they were not recorded. A more detailed explanation of the data collection and analysis in the following chapter enables further support for reliability.

3.3 Data sampling

Case study research method faces a challenge that is related to case selection (Eisenhardt, 1989). Different from quantitative studies, where the sample should be representative of the entire population, the purpose of case studies is to develop theory, therefore case selection is done by theoretical sampling: cases are selected because they are particularly suitable for extending relationships and logic among constructs (Eisenhardt & Graebner, 2007). This study has a focus on intermediary firm managers and aims to gain valuable insights into why intermediary managers prefer specific approaches to the management of exporter-intermediary relationships. Therefore, for this study the researcher approached exporter-intermediary firms in Lithuania and asked to conduct interviews with two intermediary managers in the same position in each firm. To identify suitable intermediary firms some preliminary criteria were set. Firstly, the firm in question should have been operating for at least two years. Secondly, the intermediary firm should be managing at least three different (foreign-partner) accounts. Finally, the intermediary firm should be mainly focused on one particular sector. This criteria allowed for literal replication (Yin, 2013). The intermediary firms selected represent different sectors. Company number one (A) specializes in importing men’s beauty care products and accessories, company number two (B) specializes in importing and servicing products for agriculture, and company number three (C) is importing automatic components for industrial use.

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3.4. Interview sampling and data collection methods

Primary qualitative data has been collected through semi-structured interviews. According to Eisenhardt & Graebner (2007) interviews are an efficient way to gather rich data but are criticised for being biased. The authors propose a data collection approach that can help limit the bias and encourage using numerous and highly knowledgeable informants (experts) that can view the phenomena studied from different perspectives. For this reason, interviews were held with six experts in three intermediary firms. These experts were intermediary firm managers, working in the same position in their respective firms, responsible for relationships with exporter firms (clients).

The data collection process for this study was using purposive sampling strategy with a typical case as proposed by Saunders & Lewis (2012). This method involves selecting a purposive sample that will best help answer the research question and meet its objectives and help make logical generalizations (Saunders & Lewis, 2012). The sample consists of three Lithuanian intermediaries that have been operating for over two years. Furthermore, they manage more than three accounts each, and have a specific sector orientation. This sample will be illustrative and representative of the population, albeit not statistically (Saunders & Lewis, 2012).

Concerning the interviews, semi-structured interview strategy was chosen as the interview questions might be too complicated and some researchers interference might be needed for clarification and probing. Semi-structured interviews allow for variation in the order of questioning while adding or omitting questions (Saunders & Lewis, 2012). The questions were written and all interviews were conducted in English language. All the questions with their corresponding working propositions can be found in Table 2.

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Questions WP1 WP2 WP3 WP4 WP5 WP6 WP7 WP8

General Information

How old are you? - - - X X

What is your highest education attained? - - - -

What is your position in this company? - - - -

How long have you been working in this company? - - - - X X - -

How much formal training have you received for this job? - - - - X X - -

How much on the job training have you received? - - - - X X - -

How many years in total of professional experience do you have? - - - - X X - -

How many accounts/clients do you currently manage? - - - -

Internal environment

Could you tell me what steps are involved in the process of establishing fully working relationship (contract) with clients? Who negotiates the terms of the contract in your company?

X X - - - -

Does your company have guidelines to be followed when establishing relationships with clients/accounts? X X - - - -

To your knowledge, do you think that all the accounts/clients in your company are managed in the same way? Please give example of different way of managing accounts in your company.

X X - - - -

Would you say that your relationships with your accounts/clients are often supervised/audited/controlled? X X - - - -

Motivation

Could you think of a specific client/account that you were especially excited/motivated to work with? Please explain why you think it was so exciting?

- - X X - - - -

Thinking about this motivating specific client, could you describe how the relationship with this client is being managed? X X X X - - - -

Could you thing of a specific situation when you were not motivated in your work? Could you explain what were the circumstances that made it uninteresting/demotivating to work?

- - X X - - - -

Thinking about this specific client, could you describe how the relationship with this client is being managed? How do you think it should be managed better?

X X X X - - - -

Risk taking

Would you consider that taking risks is part of your job? - - - X X

From your past work experience have you ever had to take a risk/make a risky decision when the situation was uncertain? How did you feel about it?

- - - X X

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38 First contact with companies happened via email when the letter of introduction and request for interviews were sent. A week later, phone calls were made to all companies, reminding about the email and asking for a contact person dealing with such matters. Once contact people were established they were emailed with additional information, following which interviewees and interview dates were established.

Out of the six interviews, four were conducted face-to face in the managers’ offices; the other two were conducted via Skype. Prior to each interview, the interviewee was promised to be kept anonymous, and that the name of the company as well as all the responses will remain confidential as well. This should help reduce the potential for bias and enhance the reliability of the research (Saunders & Lewis, 2012). Before the start of each interview permission for audio recording was asked and two interviewees approved to have their interviews recorded. These two interviews were recorded using an audio recording system on two different phones. In the other interviews, where audio recording was not permitted, permission to take detailed notes by both the researcher and her assistant were asked and granted. Having an additional person (assistant) who was responsible for note taking allowed for better quality data collection by investigator triangulation (Denzin, 1971). The researcher conducted and led all interviews and data collection, while the assistant only took notes. The notes were then compared and combined into one sound transcript of each interview. All interview transcripts are in the same language as the interviews and are using the actual responses given.

3.5. Data Analysis methods

When all the transcriptions and notes were done, the documents were uploaded into Nvivo and analysed using thematic coding (Attridge-Stirling, 2001). With the help of Nvivo the researcher identified key themes arising from theoretical frameworks and working

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39 propositions, while sub-codes were linked to main themes after a thorough analysis of collected qualitative data (Saldana, 2015). Key themes, sub-codes and their connection to the working propositions are represented in Table 3. Final analysis of the collected qualitative data identified text passages that were connected with the themes and sub-codes. Finally, within-case analysis for each case has been carried out and followed by cross-case analysis in which similarities and differences between results of the analysis were compared and contrasted (Eisenhardt, 1989).

Intermediary manager's prefered relationship management approaches for the exporter-intermediary relationship : the role of internal organization and personal characteristics