Trust within an Inter-Organizational
Management Control system: an
Empirical Study on System Trust.
Master Thesis Accountancy/ Control: both tracks
Written by: J.R. Witteveen
Programme code: MSc BE
Student no.: 10631917
Date: 7/14/2015
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Abstract
The aim of this study is to find how an inter-organizational Management Control System (MCS) affect the trust within an inter-organizational relationship regarding the system trust. Because systems could make less complex environments and separate them from the external world, which creates trust (Luhmann, 1982). This research applies the system theory within an inter-organizational relationship which use an inter-organizational MCS as well. The research environment is based on a manufacturer company and wholesale company which are cooperating together for several years now. This study strengthen the results of Vélez, et al. (2008) that action controls are positively connected with the system structure and therefore are both able to enhance the inter-organizational trustworthiness. The system itself create trust by creating a more structural environment where controls could be more easily been adopted and are more transparent presented as well (Coletti, et al., 2005). The inter-organizational MCS generates complex issues as well because the users could get an overload of information. Therefore it is important to hire high skilled personnel which could maintain the organizational MCS and use the right information in order to maintain the inter-organizational trust (Coletti, et al., 2005; Vosselman & van der Meer-Kooistra, 2009) In order to come to this findings this study used a qualitative case study research approach by
conducting semi-interviews, document analyzes and one observation within this inter-organizational relationship.
Keywords: Management control systems, inter-organizational relationship, system trust, system structure, complex environments
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Table of Contents
Abstract ... 2 1. Introduction ... 6 2. Theoretical Background ... 10 2.1 Systems, in general ... 10 2.2 Trust ... 13 2.3 Trust and MCS ... 15 3. Research Design ... 17 3.1 Research method ... 17 3.2 Case Setting ... 19 3.3 Data collection ... 20 3.4 Data Analyze ... 22 4. Findings ... 23 4.1 Companies background ... 234.2 Structure of the inter-organizational relationship ... 26
4.3 Incentives for an inter-organizational relationship ... 30
4.4 Structure of the MCS ... 33
4.5 Information flows ... 39
4.6 Creating a less complex environment ... 40
4.7 Users influence within the design of the system ... 45
4.8 System trust ... 46
5. Conclusion ... 53
6. Limitations & future research suggestions ... 55
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Appendix A ... 59
Interview guide ... 59
Appendix B ... 67
5 Student: Jarik Witteveen
Student number: 10631917
Education: Master of Science Accountancy & Control: both tracks Thesis supervisor: Dr. Rui Oliveira Vieira
Assistant Professor - Management Accounting University of Amsterdam Amsterdam, September 2014 – June 2015
Statement of originality
This document is written by student Jarik Witteveen 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.
Disclaimer
Copyright © Jarik Witteveen, University of Amsterdam Reproduction Except when permitted by the author, no part of this document may be multiplied, reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the author.
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1. Introduction
Within our economy there are a lot of organizations cooperating with each other in order to create synergy which will gain competitive advantage for each organization (Coletti, et al., 2005). These organizations are working together and therefore they create an inter-organizational relationship between each other. These so-called “inter-inter-organizational relationships” 1 are winning territory during the increase transparency within our world-economy (Dekker, 2004). The Inter-organizational relationships are strong influenced by the perceived trust regarding the cooperated organization, amount of used control measures and the quality of the used control measures. Moreover the inter-organizational relationship is affected by the amount of risk taken and the risk aversion each organization is willing to take. Looking at the mutual relationship of these variables, risk have a negative relationship with trust and control were trust and control have a positive relationship with each other. In order to establish an efficient inter-organizational relationship the amount of used control should be set based on the trust and risks of both organizations (Das & Teng, 2001). An efficient inter-organizational relationship is been able to give competitive advantages created by synergy of corporate goals and strategy within both organizations (Coletti, et al., 2005). More trust and a higher amount of control to each other could, both, reduce the organizational risks where trust is a more intrinsic and control a more natural and active way of reducing risks (Das & Teng, 2001). Furthermore these authors argue that trust is necessary to get a confident relationship which will, in return, enhance the possibility to succeed maintaining the relationship and prevent it from failures.
Management control systems (MCS) are used to create a stable and controllable environment within and around an organization (Anthony, 1965; Otley, 1994). Trust, control and risks are influencing the success and strength of inter-organizational relationships. The MCS are used to maintain and monitor these variables regarding the inter-organizational goals (Dekker, 2004; Tomkins, 2001). Prior research already shows the complex relationship
between MCS and trust. This researchers showed evidence about the contradictory
relationship of MCS and trust, they argue that increased control measures will reduce the trust
1 Inter-organizational relationship: something which occurs (mostly more than once) between different
7 of the employees (Tenbrunsel & Messick, 1999). At the other hand , Coletti, et al. (2005) found evidence that MCS actually could enhance trust when the MCS is used as a mediating role for collaborative environments. So when control measures increases the efficiency of the inter-organizational relation between the cooperating organizations increases. Based on this finding, the increased use of a MCS will be of added value regarding the performance of both organizations (Coletti, et al., 2005). Regarding the findings of Coletti, et al. (2005), one might assume that it is important to set control measures which represent the information,
trustworthiness and alignment between principal and agents of both organizations at once. Risks will be reduced due the use of the same MCS within both organizations. Both
organizations use the same inter-organizational MCS to coordinate the complex tasks in order to enhance the trust relationship. Furthermore the organization which receives the most control information is normally responsible for the end control of the MCS. This organization is leading in creating joint benefits by using the inter-organizational MCS (Vélez, et al., 2008).
In the context of inter-organizational relationships, trust could be separated to
“goodwill trust” and “competence trust” where “goodwill trust” is characterized on a resilient relationships and “competence trust” relied mostly on calculative results (Ring, 1996). Both trust types affects the organizational performance risk and relational risk. The relational risk could be described as the risks that an organization received by an individual who is acting with that organization (Nooteboom, et al., 1997). Or within the context of inter-organizational relationships this research use the definition “the risks that an organization received from another organization who is cooperating with that same organization”. This definition could be extended with the formulation of Das & Teng (1996) where relational risk is defined as the amount of risk and consequences the cooperated organization have fails in order to operate as desired. The performance risk defines the measures of the successes within the
inter-organizational relationship irrespective if the organizations are fully cooperating or not (Das & Teng, 1996). The performance risk refers to amount of known risk within the
inter-organization MCS which is important for determining the reliance of the information
outcomes within the inter-organizational MCS (Nidumolu, 1995). Furthermore, Das & Teng (2001) explain the goodwill trust as a type of trust which is capable of reducing the relational risk but have not any influence on the performance risk perceived within a single organization or for both organizations, when it becomes to an inter-organizational relationship. At the other
8 hand competence trust is based on the ability to do appropriate actions which are in the best interest of both organizations. Therefore a higher competence trust will give better firm reputation. The competence trust will only affect the performance risk and give no explanation on how or if certain things are actually been done in the best interest of both organizations (Das & Teng, 2001). It shows only the ability to do so and is more of an infrastructural point of view. So the conclusion is that both, performance risk and relational risk, are important for establishing a trustworthy MCS within an inter-organizational relationships and both influence the trustworthiness differently.
Vélez, et al. (2008) found that MCS could enhance the trust between organizations even when trust is already well established. The created trust gives more confidence in further cooperation’s which results in more use of inter organizational MCS, this will again result in more trust and so forth. The authors shows that the reaction between trust and control results in a positive relationship with each other. Based on this relation, the authors are able to argue that all the informal controls, action controls2 and result controls3 establishing trustworthiness regarding the inter-organizational relationship. Velez, et al. (2008) found, in this same
research, evidence about the action and result control measures and their independency. Because both controls are enhancing the independency of the organization and therefore create the ability to demonstrate the corporate goals of the organization in a more extensive way. At the end each organization, within the relationship, will receive more clearance about each other preferences which will enforce the inter-organizational relationship. Moreover Velez, et al (2008) found that the existing MCS did not lack in existed trust but are used in order to influence the perception of each other. To get the MCS as efficient as possible the interpretation of the MCS and the willingness of users to participate with the MCS should be encouraged. Prior research showed that current used inter-organizational MCS are, most often, not optimal attuned to the companies which are involved within this inter
organizational MCS (Ireland, et al., 2002; Dekker & van den Abbeele, 2010). As mentioned before, one of the most important motives to start an inter-organizational relationship is to
2 Action controls: try to ensure that desired actions are used and non-desired actions are minimalized as far as
possible (Vélez, et al., 2008).
3 Result controls: motivating the achievement of the desirable results by giving promotion, compensation or
9 create synergy (Coletti, et al., 2005). Dekker & van den Abbeele (2010) argue that the optimal synergy within an inter-organizational relationship is not achieved yet, because there is still room for integrate the inter-organizational MCS more efficiently. In order to get more
knowledge about which type of construct creates the non-optimal synergy, Vélez, et al. (2008) calls for future research to examine if some particularly other constructs impacts the relation of the MCS and trust regarding the inter-organizational relationship. They claim that research about the construct of “system trust” could be of additional value to strengthen the knowledge about the inter-organizational trust within the system of the MCS itself. This could be from additional value to the non-optimal synergy problem, which the management accounting discipline currently faces. Moreover, research regarding the system trust in MCS will strengthen the findings of Velez et al. (2008) their investigation and all prior studies about trust, alignment and value creation of the MCS in inter-organizational relationships.
In order to get more information about trust within inter-organizational systems a MCS, is arguably, the most important system for measuring this trustworthiness. This assumption is based on the fact that MCS are used to connect both organizations due the use of control and performance systems. Control and performance measures are both important for making corporate decisions and they are related to the amount of trust in the individual or entity who/ which release the control or performance measures. Therefore a MCS includes the given trust and received risks of everyone who use the particular inter-organizational MCS (Das & Teng, 2001; Ring & van de Ven, 1992). The focus of this research could be found within the context of inter-organizational relationship and more specific to the trust regarding the inter-organizational MCS and how this differs from the intra-organizational MCS.
This research is grounded with the “System trust” theory, developed by Niklas
Luhmann (1982). Luhmann explains the relation of trust issues, the external environment and society regarding to the use of a system in sociological context. He argues that a system is able to realize a less complex environment into the external world where information flows would create more confidence to the users of the particular system. Therefore systems are been able to create a less complex way of communication. Nevertheless systems have
boundaries which separates them from the external world. When systems are not trustworthy the boundaries between the external world and the system will be weaken or even blurred, this results in more complexity (Luhmann, 1982).
10 The aim of this research is to find how a MCS influence the trust of the participants within an inter-organizational relationship, more specific the system itself will be
investigated. By using the system trust theory, the researcher investigate which kind of role the system has related to the trust process of an inter-organizational relationship. The system trust, as developed by Luhmann, will be used to explain the trust within the
inter-organizational systems because Coletti et al. (2005) found that more alignments between organizational preferences will enhance the efficiency created by MCS. Furthermore Velez et. al (2008) found that created trust, caused by use of the MCS, will give incentives to use more control measures which again create more trust.
This research aims to strengthen the results of Tomkins (2001), Coletti et al. (2005) and Vélez et al (2008) which all stated that MCS will enhance the trust within an inter-organizational relationship when the MCS is used in a proper and efficient manner. This research focus on the competence trust as described by Das & Teng (2001) . With the use of competence trust this research will try to find an explanation of the performance risk the inter-organizational information systems entail. More specific this research investigates how a systematical infrastructure affects the performance risk of both organizations, because when the performance risk is reduced the ability to get more goodwill trust within the
inter-organizational information systems will rise and so the efficiency and synergy of both organizations as well (Das & Teng, 2001; Luhmann, 1982; Coletti, et al., 2005).
2. Theoretical Background
2.1 Systems, in generalA system could be defined as a "set of elements standing in interaction” (Ludwig. 1969, p. 38). A system makes the transformation from data to information less complex and/or the communication between individuals or entities more safe from errors (Luhmann, 1982). Nowadays systems became more relevant because of the increasingly complexness of the world. Humanity explores that more certainty creates more uncertainty (i.e. due the economic crisis 2008) and therefore the amount of inter-organizational cooperation rises (Vélez, et al., 2008; Flood, 2002). This calls for system integration, less complexity and
11 therefore higher probabilities. Before investigating the integration of systems it is important to know a bit more about systems in general.
The first well-known system is developed within the Natural Sciences discipline by the French scientist Carnot, in 1824. This system makes it possible to trigger an action/ event when some other process are already been done or still working. This type of system
emphasized the process chain which could be established to make work more efficient. The “General System Theory” is one of the most important and oldest theories about making the system themselves more efficient. This theory suggests that there is a general tendency to integrate all different angles of: sciences, natural and social aspects. Each different science angle could have some solutions to problems of another angle and therefore the users should combine the system development of each science to create better systems in each avocation it is used (Ludwig, 1969). The General System Theory, founded by Ludwig (1969) is already a more comprehensive system which could be used in different disciplines rather than the first system established by Carnot (1824). Due the General System Theory, systems could be divided in “human-made” and “natural-made” systems where human-made systems have the purpose to achieve delivery of outputs instead of giving rather answers relating to purposes as we do in the natural-made systems (Checkland, 1981) . Related to this research, the human-made systems are more relevant, especially systems theory which is focused on the human behavior. Within the Sociological Science there is already a lot of research been done regarding the human behavioral element of the system theory. One of the most important researchers specialized in the System Theory is Niklas Luhmann, founder of the current sociological system approach (Luhmann, 1982). He argues that the world is a complex
environment of interconnected parts and the purpose of a system is to create less complexness by defining boundaries which separates the external environment from a less complex internal environment. By doing this, there must be decided which entities are inside and which are outside the internal environment. This simplified representation of the total environment creates the ability to make predictions and make data flows which finally creates information outcomes (Luhmann, 1982).
12 A system as used in the sociological view of Luhmann (1982), is much different from the standard cybernetic system4, which is often been used in the quantitative sciences. An important element of the system theory, as used in Luhmanns research, is that social life could not be grounded on a material or ideal base. The social structure is no naturalistic element which could be seen as a certain value, neither a bunch of symbols which represent the value of the social structure related to the system. Second, the social structure is a result of
interacting between individuals which is not simply measured by prior results and must be found in discussions and interactions made between these individuals. The future prediction of the social structure should be based on common sense regarding the negotiated dialogues between individuals. It is important to use common sense and human reasoning rather than quantitative models. Moreover the social structure should been seen as parts which are temporally open and closed and each of them forms a fragment of the total comprehensive social structure. This fragments could each take their share in estimating the future
predications regarding the social structure and therefore future estimations could be differently calculated through time (Murphy, 1982).
The definition of systems is important to determine the amount of trust, created in the organizational relationship. This research aims to investigate the MCS within an organizational relationship. It is important to determine the definition of the MCS in an inter-organizational relationship because the origin of the MCS is established in a single
organizational context and so this MCS is designed for users within single organizations instead of multiple organizations (Meckling & Jensen, 1976). Therefore the standard definition of the MCS could differ from the inter-organizational definition. An appropriate definition of an inter-organizational MCS is that “the MCS is a key activity for every business organization as it provides the focus for all those activities designed to help ensure that overall operating coherence is maintained and that the organization retains a capability to survive in its uncertain environment” (Otley, 1994, p. 294). This definition is based on a single firm approach but could be extended to an inter-organizational context.
4 A system used in the mathematical, biological and technical sciences where social life should be excluded out
of the system. This system works with layers on a hierarchal level to conduct a system which should be of heteronomous nature (Murphy, 1982).
13 In general, the inter-organizational MCS creates more harmony due the capability to make relational contracts more flexible (Coletti, et al., 2005). Ring & van de Ven (1992) found evidence that more flexible contracts give more room for transactions. These transactions are based on firm and performance controls which are used to create more confidence. In other words a more flexible contract creates more risks but this risks could be captured by implementing the MCS and therefore give more flexibility within the inter-organizational context (Ring & van de Ven, 1992). This result reinforces the statement of Coletti, et al. (2005) which tells us that a MCS could create more alignment between the companies within an inter-organizational relationship. A higher alignment between the organizations will create more trust regarding the inter-organizational relationship whereby the motivation to made use of an inter-organizational MCS will be enhanced in order to get even more synergy (Vélez, et al., 2008; Coletti, et al., 2005).
2.2 Trust
Trust as, used within the management accounting, is borrowed from the sociological science. Mayer et al. (1995, p. 712) describes trust as “the willingness of a party to be
vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party”. This definition of trust is mainly based on a single directed flow from trustor to trustee. This focus is too broad for defining trust within inter-organizational relationships. Feams et al. (2008) developed a more defined definition of inter-organizational trust, this definition is borrowed from different researchers in order to get a complete
inter-organizational trust definition, namely: “Positive expectations regarding the other party in a risky situation (Lewicki, et al., 2006; Rousseau, 1998)…trust is a multidimensional concept (Das & Teng, 2001), encompassing positive expectations about a partner’s ability to perform according to an agreement (competence trust) as well as the party’s intentions to do so (goodwill trust)” (Feams, et al., 2008, p. 2008). Within this research the definition of Feams, et al. (2008) will be used according the meaning of trust within an inter-organizational context and especially regarding the competence trust of the MCS.
The way how this research investigates trust regarding an inter-organizational MCS is borrowed from the sociological discipline and is developed by Niklas Luhmann. The so-called
14 “system trust”, as used in the social theory explains the complexness of a system within the environment. Luhmann (1982) claims that systems are not objective and related to time. Therfore a system could be seen as a phenomena which is used in a social order within a particular time frame. He defines this dynamic systematical environment as a “lebenswelt”. A system integrated within this lebenswelt could not be eliminated like e.g. factors in objective studies. In contradiction, a system creates a controllable environment within the external environment and reduce the complexness which enhance the trustworthy relation between the multiple users (Luhmann, 1982). This is in line with Free (2008) and his findings about trust and the complexness of estimating the trust. Because Free found that trust could not be
measured by tenure nor only by question an individual about their thoughts of trustworthiness. He argues that trust and tight relations should not be confused with more accounting controls and the openness of conducting these controls. It is important to know that there is generated trust and existed trust which defines the relationship of the noticed accounting practices, trust and trustworthiness. The power relationship between both organizations is important because it determine how it could window dress the measured trust. To conclude on this, power relationship and the noticed accounting practices are mostly biased by the most power full partner and should be distinguished of the measured amount of trust (Free, 2008).
Mayer et al. (1995) developed an integral framework (see figure 1) to explain the comprehensive relation regarding system trust and the interactions between organizations and/ or persons.
15 Figure 1 – Proposed model of trust (source: Mayer et al., 1995, p. 715)
Trust is something that differs between each individual and is based on the trait of the particular person or organization which is called “trustor propensity” or “goodwill trust”. The ability, benevolence and integrity are 3 factors which are maintained and created by the trustee and could be described as “competence trust” (Das & Teng, 2001; Mayer, et al., 1995).
These factors are the opposites of the trustor propensity and together they establish a certain amount of trust. English & Baxter (2010) found evidence that the relationship between trustee and trustor could be captured by a contract or agreement and so create more certainty by funneling perceived traits of both. Nevertheless the outcomes of the actual trust received often differs from the perceived trusts made between an agreement of trustee and
trustor (English & Baxter, 2010; Ring & van de Ven, 1992). System trust could reduce the difference between the perceived and received trust by setting boundaries and therefore establishing an
environment which delimits the difference between perceived and received trust at an acceptable level (see fig. 2).
2.3 Trust and MCS
There is much evidence which shows that trust and control have a relationship where they influence each other. A few years ago scholars argue that increased use of control measures will reduce the trust between the trustor and trustee (Tenbrunsel & Messick, 1999). Furthermore the MCS where described as a system which controlled the preferred goals of an
16 organization within the environment (Anthony, 1965; Meckling & Jensen, 1976). As
mentioned earlier on, within the last years, the inter-organizational relationships are growing. Moreover, Dekker (2004) found that inter-organizational relationships use comprehensive inter-organizational MCS. Based on the increased use of inter-organizational relationships, this research can assume that there is a complex environment within inter-organizational relationships which became more important due more use of an inter-organizational
relationship within the management accounting discipline (Dekker, 2004). Otley (2004) and Vélez, et al. (2008) found that inter-organizational trust became more important beyond the organizational boundaries. Moreover, Vossel & van der Meer-Kooistra (2004) found that trust and control act both as an interactive relationship and are able to strengthen each other.
Therefore trust and control could be seen as complements. So trust could not be maintained without control measures and the control measures could not be used in an appropriate manner when trust is not sufficient existed between the trustor and trustee (Vosselman & van der Meer-Kooistra, 2009). So there is a clear relation between this researchers, because the use of inter-organizational relationships is currently risen (Dekker, 2004) which calls for more inter-organizational trust (Vélez, et al., 2008), this trust is created by using more control measures (Vosselman & van der Meer-Kooistra, 2009) and therefore the inter-organizational MCS should be implemented in order to get an optimal point where all cooperated companies get the maximum trust within each other (Coletti, et al., 2005).
It is important to strengthen the relation of trust and control in a well-balanced manner. Regarding an inter-organizational relationship this should be managed by achieving long-term goals for both, trust and control. Moreover institutional trust5 is created by social values, legal and outside regulatory principles. Institutional trust influences the overall inter-organizational trust. This type of trust could only be fractionally captured with control measures and therefore they established only a thin layer of trust regarding the transactional
5
Institutional trust: the institutional trust explains the micro-level trust of users related to the macro-level organizational processes (Rousseau, 1998).
17 Figure 3 Accounting Control Nexus
(source: Tomkins, 2001, p. 170)
relationship (Vosselman & van der Meer-Kooistra, 2009). Nevertheless control measures are important to support trust, so therefore the accounting-control-trust nexus of Tomkins (2001) will be used within this research. This simplified curve (see figure 3) shows that control
demand is increasing when the trust of both parties increase as well, especially within the start-up phase of the inter-organizational relationship. At subsequent phases the slope will decline and even become
negative. This happens when trust between both parties reach a certain maximum level (Tomkins, 2001). Moreover, this interesting feature is supported by the findings that alignment of organizational trust will enhance the inter-organizational trust and also the willingness to cooperate more. Dekker (2004) found that goodwill trust will reduce the transactional hazard and the use of formal control measures as found in the case study. The importance of partner experience have an influential role in determining the need of controls started from the beginning of the inter-organizational
relationship. Nevertheless the importance of the trust which is generated regarding the system itself is never found yet. We know that control and action controls have a positive influence on the trust but we do not know if the system which includes this controls affect the trust as well (Vélez, et al., 2008). In other words are the performance risks, related to the system’s internal created environment, influencing the trust within the inter-organizational
relationship? This research aims to make a contribution regarding this lack of knowledge within the management accounting discipline.
3. Research Design
3.1 Research methodSo the core objective of this research is to gain knowledge about how the system structure of a MCS affects the trust within an organizational context. The
inter-organizational MCS generates trust to the participants and therefore inter-inter-organizational MCS could generate synergy (Coletti, et al., 2005; Vélez, et al., 2008). A system, in general, is used to make a less complex internal environment and separate the data from the external
18 environment (Luhmann, 1982). With this in mind, it would be important to know if the
separation of these two environments affects the trust regarding the inter organizational MCS as perceived by the participants of an inter-organizational relationship. In order to gain knowledge about the system trust, this research is conducted within an inter-organizational environment. Because participants within an inter-organizational environment rely more on trust in each other than intra-organizational participants do (Li, 2005). This is confirmed with the research of Coletti et al. (2005) which states that participants, of an inter-organizational relationship, rely much more on the MCS for having trust in each other.
By choosing the most appropriate research method, it is important to find out how inter-organizational trust could be investigated. Trust is established by human behavior and therefore it could be hard to determine. Trust is established by a certain amount of honesty, reliable reputation and integrity of one party to another (Currall & Inkpen, 2002). So in order to get knowledge about how an inter-organizational MCS affects the trust of the participants it is necessary to study how the behavior of each participant is influencing the interpretation of that behavior to the other party/ parties. Trust could be found by using an explanatory research method which will give an explanation about how the trust within the inter-organizational relationship is affected. An explanatory research approach is used when the researcher believes in a social construct. A social construct means that the researcher cannot step outside the case to interpret and make analyzes the MCS but instead the researcher must actually interpret and analyze within the social context (Scapens, 2004).
Within the accounting discipline the case study research method is most often used in order to get understanding of accounting issues related to the social construct (Scapens, 2004). An important characteristic of a case study is the outcome of rich descriptive or explanatory data which is important for investigating the human behavior (Yin, 2013). Moreover a case study is suitable in creating a rich-descriptive analyze of human behavior because it describes or explains the human behavior regarding the phenomena of interest (Merriam, 2009). Within this research there is made use of the case study approach in order to get an understanding of the system trust perceived by the participants of the inter-organizational MCS.
19 3.2 Case Setting
Qualitative research is conducted within a social construct and, most often, this results in a closer relationship between the researcher and the participants compared to a quantitative researcher method which is making use of a researcher outside the social construct. In
general, it would be better to conduct a research within an environment where a researcher has no close relationship with the research participants because the researcher should have less influence regarding the collected data (Scapens, 2004). Based on this, the research assumes that, a qualitative research deals with a kind of trade-off effect between getting in depth analyzes and the amount of influence within the social construct. In order to have a proper research environment, the trade-off should be balanced because in-depth analyzes should not result in much influence of the researcher or the other way around.
To make use of the right case study research approach it is important to determine if the aim of the research is to explore or explain a phenomena because both types of case studies use a different kind of approach for collecting the data. A case study within an exploring nature is used to investigate something which is not clearly defined yet while an explanatory cases study is focused on contributing to an existed theory (Spicer, 1992). This research is of an explanatory nature because this research implements the system theory (Luhmann, 1982) within a new research environment (inter-organizational relationship) because, at the end, this research should explain if the system theory is different within the inter-organizational relationship compared to Luhmann’s (1982) findings. The new research environment should at least consist of a MCS within an inter-organizational relationship and therefore this research environment is chosen based on theoretical needs instead of random data collection which is often used for quantitative studies (Eisenhardt, 1989). Moreover, this author gives examples of various theory testing studies which support that. All this examples shows one similarity, namely: getting a holistic research environment which generates
appropriate data for the extended theory. This research used the prior literature in order to find a proper research environment.
This research is conducted within an inter-organizational relationship consisted of two companies which are both operating within the Pet Retail Sector and are intensively
20 nutrition while the other company operates as a wholesaler of different brands of pet and cattle nutrition’s and accessories. The chosen research
environment aligns with the one used by Vélez et al. (2008) because both samples are based on a
manufacturer-wholesaler inter-organizational relationship. This will strengthen the aim of this research because of the
similarities between the inter-organizational relationship between this research and the research of Vélez et al. (2008). Another important requirement for the research environment is that there is an existence of an inter-organizational relationship. The inter-inter-organizational MCS have a system boundary which is beyond the company
environment. This research investigates if this system boundary affects the trust within the inter-organizational relationship by using the system trust theory.
3.3 Data collection
It is important to use triangulation as much as possible in order to increase the research quality (Yin, 2013). Therefore this research is making use of the construct validity6, internal validity7 and reliability8 of this research (Yin, 2013). The construct validity contains multiple sources like semi-structured interviews, document analyzes and observations. The interviews will be semi-structured because this will give the researcher more room for asking additional questions. The semi-structured interviews will strengthen the data collection and, at the end, it will align the research data collection and aim of this research more extensively. In order to conduct this semi-structured interviews the researcher used an interview guide for both companies (Appendix A). This interview guide includes a motivation for each question by the Italian styled grey texts and this is put between brackets. The internal validity is accomplished by coding all documents, interviews and the observation into one database which enables the
6
Construct validity: establish a chain of evidence and made use of multiple sources in order to enhance research quality. (Yin, 2013).
7 Internal validity: make pattern matching available so there is evidence from several sources which strengthen
each other (Yin, 2013).
8
Reliability: make use of a case study database and try to get a database with less room for errors (Yin, 2013)
Figure 4 – system boundary inter- vs intra- organizational relationship
21 researcher to find the same results from different sources. Finally the reliability is maintained by the use of MAXQDA, a qualitative research analyze program which enables the researcher to have one database which includes all sources. Moreover this software package consist of an option to use time stamps linked to the audio files which will increase the database integrity because it would be more easily to check whether transcribed quotes are actually been said.
The researcher has conducted 7 interviews and analyzed several documents.
Moreover, the researcher used his own observation to verify the findings collected by other sources (see table 1). The researcher has a job by a customer of the wholesale company, he observed some logistic issues during the inter-organizational relationship introduction period at the beginning of 2014.
Source Function/ type Company Duratio
n of the intervie ws
Language Stored
Interview CEO Wholesale company 60 min. Dutch Tape
Interview COO Manufacturer company 90 min. Dutch Tape
Interview COO Manufacturer company 120 min. Dutch Tape
Interview Data manager Wholesale company 35 min. Dutch Tape
Interview Financial Manager Both companies 40 min. Dutch Notes
Interview Logistic Manager Wholesale company 37 min. Dutch Tape
Interview ICT Manager Manufacturer company 15 min. Dutch Notes
Document Business
presentation
Wholesale company - English Presentation
Document Business
presentation
Manufacturer company - Dutch Presentation
Document Income statement Wholesale company - Dutch Report
Document Weekly
performance report
Wholesale company - Dutch Report
Document Budget report Wholesale company - Dutch Report
Document Debt statement Wholesale company - English Report
Observations Infrastructure Manager
22 Each interview is conducted at site of the manufacturer (Deinze, Belgium) or
wholesaler (Zwolle, Netherlands) except of the second interview with the COO which is held at hotel “van der Valk” in Arnhem, Netherlands. Before starting the interview the researcher asked the permission to tape record each interview. The recorded interviews were transcribed shortly after they took place because the interpretation of each conversation is still in the mind of the researcher. There are two interviews which are noted and they are stored into the
research database short after the notes were conducted. At the start of each interview the researcher introduced himself and explained the aim of the research in order to give knowledge about the purpose of the interview. Moreover he asked several introduction questions about the background of each interviewee so he was able to verify the position and the influence each interviewee has regarding the inter-organizational MCS. The documents provide knowledge about the comments each interviewee have about the MCS in use. The documents give more clearance about how information is collected or presented and gives this research an explanation about how the users/ interviewees use their MCS reports. Moreover it is a useful verification tool to analyze how the information is interpret. The logistic problems, which were observed by the researcher during his job, gives this research additional
information about how the organizational MCS affects the trust within the inter-organizational relationship.
3.4 Data Analyze
All data is stored in the MAXQDA database. The database is backed-up to, another location of the hard drive, every time the researcher made some additional changes. The hard drive of this computer is backed-up every day to another geographic location in order to secure all important files so this databases included. The interviews are stored separately and the transcribed files are stored in combination with the audio files and time stamps so the researcher could, at any time, verify the quotes which are used in the research paper. The documents are separately stored within this database and are named by their type or specification (i.e. P/L wholesale company).
To analyze the data the researcher categorizes all data into codes in order to get
findings regarding the inter-organizational MCS trust and subjects which are influencing these findings. The process of coding is started by searching which kind of codes the theory should
23 cover, some type of codes which are used are “the structure of the MCS”,
“inter-organizational contract” and other subjects like the added value of the systems, for example creating less or more complexness. With this in mind the research starts with open coding, this codes give a sort of expression which includes a few keywords about what is been said (Flick, 2009). Open coding give the researcher the possibility to make selective codes and categorize the data into useful information in order to conduct findings. The selective codes would relate different kind of groups and develops more information related to the theory. Both type of codes will be made to get more knowledge regarding the question “how does the inter-organizational MCS affect the trust of the participants?” in order to get answers to, who, how, when, why or by whom type of questions which would be related to the quotes or other type of data (Flick, 2009). After coding each document, interview and observation there is been made use of the analytic tool “text retrieval” which combines all documents by the selected codes and gives the possibility to search for repeated words, figures, sentences or expressions. This gives the researcher the possibility to analyze the gathered information in order to get some interesting findings which are related to the aim of the research.
4. Findings
This section gives explanation about how the system structure of the
inter-organizational MCS affects trust within the inter-inter-organizational relationship. This research is using the System trust theory of Luhmann (1982) for analyzing the conducted data and make the findings. Within this chapter there are 8 different sections which in total give a holistic knowledge about the system trust within the inter-organizational relationship. Because this inter-organizational relationship consist of few inter-organizational participants, the amount of interviews could not be increased to more than 7 interviewees. In order to get proper results and to eliminate subjectivism this research links the findings as much as possible with existed theory in order to give findings which are related to that prior theory.
4.1 Companies background
The manufacturer is established in 1933 and started producing cattle nutrition’s and selling them to local farmers in Belgium. From that day on the company is been growing and have merged several companies in order to be a complete pet and cattle nutrition producer
24 nowadays. Their ambition is “to be your favorite brand for pet nutrition and accessories” (Business presentation, Manufacturer company) and they explicit add that “your” is been used in the most broadest sense of the word, so not only you as person but also the animal who benefits from the product and the society where the company is surrounded with. The
manufacturer company operates in 75 different countries with 8 plants divided over European, Asian and American continents. Because the manufacturer company is operating at a maturity stage the company tries to expand their market share by acquiring wholesale companies in order to get more influence in selling their brands and creating market share. The created distribution channels are fully owned by the manufacturer group in order the have control of their own brands within the distribution process to the local stores. The warehouse company is acquired by manufacturer company in 1999. The warehouse company is established in 1929 and operates till 1999 as an fully owned family company. The wholesale company is
specialized in distributing pet nutrition, cattle nutrition and accessories to local pet stores. The ambition of this wholesale company is “to be, on a profitable way, an attractive B2B partner in the pet sector”.
In 2014 the manufacturer have sold 50% of their shares in the Dutch wholesale
company, the 50% stake is sold to a pet store retail corporation. This corporation is the largest pet store company in the Netherlands. The structure of this corporation is mainly based on franchise stores within garden products, pet product and cattle products. This company did not cooperate actively with the manufacturer company nor wholesale company before the inter-organizational relationship occurred. This acquirement gave the possibility to combine the warehouses of the wholesale and pet store corporation in order to create synergy (Coletti, et al., 2005). A major benefit for the manufacturer could be found in the possibility to establish new sell channels with franchise pet stores owned by the pet store corporation.
The wholesale company is 50% owned by the manufacturer company and 50% by the pet store corporation. The pet store corporation bought their stake in the wholesale company because they want to create a more powerful purchase organization than their own purchase department was before. Because they are combining their warehouse with the wholesale company warehouse and they also combine their assortment with the manufacturer
assortment, they are together able to create a higher market share and so a better negotiation position regarding the suppliers and so getting lower purchase prices (Buying4Pets, 2015).
25 The pet store corporation is excluded from this research because the inter-organizational MCS is mainly used by the wholesale and manufacturing company. The pet store corporation is attending the monthly performance meetings and checks the yearly performance reports but the wholesale company is mostly controlled and directed by the manufacturer company. The pet store corporation have less influence on the inter-organizational MCS and therefore this research investigates only the manufacturer company and wholesale company which use the inter-organizational MCS more intensively.
The MCS of the inter-organizational relationship consist of different software packages which are connected with each other by interfaces for getting one clear software structure. There are 3 important software packages within the inter-organizational MCS, namely: COGNOS, “Facturatie Systeem Versele-laga” (FSV) and ASW. COGNOS is a software which is used to monitor the financial and non-financial performances measures and is used for making reports used by the meetings. This meetings are scheduled every month with the “Grand Committee” and weekly with the “Petit Committee”. The Grand Committee consist of the COO manufacturer, CEO pet store corporation, a financial manager of the manufacturer company, a financial manager of the pet store corporation and the CEO of the wholesale company. The Petit Committee consist of the COO manufacturer, CEO pet store corporation and the CEO of the wholesale company. Some other reports are exported from COGNOS in order to support daily business processes i.e. the logistic flows. The COGNOS system receives data from the FSV and ASW software and is a business intelligence and performance software package. This software gives the data manager the ability to filter all data and generate informative reports for analyzing the companies performances. The COGNOS software is the most important MCS software and is used on a daily base. The COGNOS software package is developed by IBM and is used for several years within the manufacturer and wholesale company now.
The FSV software is internally developed by the manufacturer company and is used for maintaining the order and invoice flows. Almost all data entries are made within this software which is caused by the administrative department which entered all the orders into this software package. Finally, the ASW software is the accounting software which is used for editing the General Ledger and prepare the P/L, Balance Sheet and the Cashflow Statement.
26 The inter-organizational MCS is based on budgets and actuals. The budgets are made by the Grand Committee at the beginning of each year. The revenue and margin are the most important budgets, they are made for each cost type and they are valuated each month. The monthly performance report consist of the budget, actual and differences between the budgeted and actual revenue and margin’s. The budgets are filled by the CEO of the
wholesale company while the actual are filled by the financial manager (Appendix B). The reports are sent by the data manager and are made within Excel. The petit committee receives the weekly performance report and evaluate this report every week. This report consists the margin for each product group and is used to notice differences in margins compared to the margins of prior periods (Appendix C).
4.2 Structure of the inter-organizational relationship
This inter-organizational relational context consists of a manufacturer and an 50% owned wholesaler, the other 50% is owned by another pet store corporation. Both companies have merged their logistics in warehouse in order to create synergy. The COO, who is
responsible for the distribution of the manufacturer brand in the Netherlands, explains the new situation as follow:
“A new phase is started where I have to change the way how I manage the Dutch distribution channel because, before the joint-venture, I was more often at site. You could say, before the joint-venture, we worked with a more practical standard. This was never an issue because the warehouses in the Netherlands where used to the idea that I could visit their warehouse at any moment. Moreover our company was the full owner of the distribution company so, actually it was a normal thing to do. Within the new situation this is different, the controls measures are captured through reports and be evaluated from a distance. This is logical of course due the influence of another owner who have not that close relationship with the wholesale company yet. But eventually I am still visiting the warehouses to get a grasp about the work environment instead of the other owner who doesn’t. ”
27 The citation of the COO describes that the inter-organizational relationship gives him less influence in controlling the new inter-organizational relationship in the way he was used to it when they fully owned the wholesale company before. This is in line with the finding from Free (2008), because he mentioned that close relationships should not be confused with the trust created by the accounting controls. This is caused due existed trust which window dress the trust of an inter-organizational relationship because without the inter-organizational relationship, this trust still exist. The inter-organizational relationship is still partly based on the influence of the manufacturer company, this is caused to the close relationship between the manufacturer company and the wholesale company which is established in times that the manufacturer company was a 100% subsidiary of the manufacturer company. Therefore this research recognized an inter-organizational trust which already existed before the
joint-venture took place. This trust could window dress the findings because it could give an idea of created trust which already exist before the cooperation, the so-called goodwill trust. This research focusses on the competence trust and therefore this goodwill trust is excluded in the system trust theory as used for this research.
Within this research the interviewees argue that the warehouse company have much influence within the inter-organizational relationship also. And more importantly, not less than before the joint-venture was started. This contributes to the findings of Free (2008) as well because he mentioned that the power relationship could affect the trust within the inter-organizational relationship also. So, when there is a strong relationship, a large part of the trust is established caused by this relationship. Because the COO of the manufacturer and the CEO of the wholesale company have a close relationship the CEO wholesaler have much influence into the decision making process also. Obviously, the function as CEO is of a responsible nature and therefore it seems to be normal to get influence regarding decision making processes. The COO of the manufacturer explains that an director should be able to making decisions for managing his company in an proper manner otherwise he should not be a director anyway. Furthermore, the COO explains that when the CEO of the wholesaler found any problems, which will affect the business he is responsible of, it would be in his favor to involve the owners in order to solve the problems and avoid any blaming of
mismanagement afterwards. He calls it a cross-pollination control element where each of the members within the “petit committee” will control each other based on their individual incentives.
28
“There is an agreement that when there are any issues within the wholesale company we will solve them within the so-called “petit committee”, this committee consist of the COO which represent the manufacturer, the CEO of the pet store corporation and the CEO of the wholesale company itself. The CEO of the wholesale company is responsible for making the announcement within the “petit committee”. Moreover we have agreed that when there are for example logistic problems the CEO comes to the CEO of the pet store corporation or when there are product quality issues he comes to the COO of the manufacturer.”(COO,
manufacturer company)
“The “Grand Committee” consist of 5 members: me with my financial manager, the other owner with his financial manager and the CEO of the wholesale
company. This “Grand Committee” designs the mission and vision of the wholesale company, which is based on a long-term horizon. The CEO of the wholesale
company should work this out by making a strategy and corporate goals to accomplish this long term mission and vision.”(COO manufacturer company)
This confirms the finding that the CEO of the wholesale company have the influence to manage his own business, namely on a strategic level. The close relationship between the COO of the manufacturer company and the CEO of the wholesale company is confirmed by the explanation of the CEO about the business relationship between him and the COO of the manufacturer company:
“I have been working a lot with the COO of the manufacturer and still do. Since he entered the company I have helped him with practical issues because of the
experience I already had. The COO and I are each other opposites and I really do not rejoice in the day I will know the last day of cooperation will come.”
The COO of the manufacturer and the CEO of the wholesale company have a close relationship with each other and therefore the relationship within each other would be more on an colleagues level rather than on a business relational level. Nevertheless the company is
29 not fully owned by the manufacturer anymore and therefore this research assumes that the inter-organizational relationship influence the relationship within both managers. This is confirmed by the finding that the COO visits the wholesale company less frequently than he did before. Moreover the joint-venture established a more structured MCS in order to inform both owners. The COO quotes:
“The CEO of the wholesale company already knows what kind of performance reports an owner wants to see. The wholesale business isn’t that complicated because you talk most often about revenue, margin and some service KPI’s. But since we have to deal with 2 owners the performance reports are sent more often.” (COO, manufacturer company)
The CEO also confirmed the more structured way of using their MCS. He tells that the more structured and frequently use of their performance reports has his preference:
“I’m glad we sent our performance reports on a weekly basis which is far more structured because I have more comfort about the figures now. To inform the owners about the figures each week it’s like a burden of my shoulders. Otherwise I have to keep in mind everything I have to say or how I have to justify some changes during the period. The shorter the period, the better because we are been able to manage more accurate on changes.” (CEO, wholesale company)
This finding gives an explanation about the goodwill trust this inter-organizational relationship currently faces. The goodwill trust, which had a major influence due the close relationship of the wholesale CEO and the COO of the manufacturer company, is decreased by the introduction of the inter-organizational relationship at the beginning of 2014. Both owners agreed to use a structured inter-organizational MCS combined with week and month evaluations. So the system trust is now less dependent on the
participants willingness to complete their responsibilities regarding the MCS (goodwill trust) and is more dependent on the ability to show the performances on a standardized system (competence trust).
30 4.3 Incentives for an inter-organizational relationship
When the researcher asked the COO of the manufacturer company about their mission and vision the COO says:
“95% of our products is produced within our own plants. Our focus is to make high quality brands, only brands, brands, brands and no private labels. It takes a lot of effort but that is what we believe in, what creates the most value. We expressed this with our slogan “the best choice”, we want to go for that brand, it is in our minds within every process and every step we take.”
The slogan of the manufacturer “the best choice’ contributes to the suggestion of the COO that their company is striving for producing high-end brands which are the best choice of their customers, social environment and the animals. He argues that they want to be the best within their market. The business presentation confirms this by giving some core values of their business like: “doing better and better”, “strive for improvements and progress” and “to be
preferred supplier” furthermore this presentations express that all processes are been done in
a sustainable manner without bringing any harm to the environment, people and animals. The business presentation of the wholesale company clearly state:
“We aim, in a profitable way, to be an attractive B2B partner in the pet sector business and to develop the manufacturer market share to a maximum.”
This vision is a bit surprising because it claims to create value for the manufacturer instead to create value within their own business. Furthermore the other shareholder is not mentioned within this mission. When the researcher asked the CEO of the wholesale company why they only add the manufacturer in their mission statement he told that this mission is made before the joint-venture took place and they still stand for the same mission because they want to extend the market share of the wholesale company and still see this as the most important vision of their company.
The cooperation between the wholesale company and the manufacturer company seems to be established for maximizing the market share of the manufacturer company. In order to
31 get more clearance about this the CEO explains why the wholesale company is bought by the manufacturer company and which type of incentives they had to buy the wholesale company. The CEO of the wholesale company argues that the prior business owners where ready for retirement and the manufacturer could extend their market share by buying the wholesale company.
“The wholesale company is sold in 1996 to the manufacturer company. The prior owners were on an age which give them the incentive to sell the
company in order to receive the cash they wanted to have.”(CEO, wholesale company)
“The manufacturer recognized that a normal wholesale company isn’t been able to sell all their products because wholesale companies would not buy the slow movers. So in order to sell their whole assortment they have to get control on a distribution company. This was the beginning of the intensive cooperation between our business and the manufacturer which was a result of a 100% take over by the manufacturer. Eventually they sold 50% of their share to another pet store corporation to get even a more extensive
assortment and a more efficient logistic process.”(CEO, wholesale company)
So the wholesale company seems to be an important strategic move for the manufacturer company in order to create synergy and more market share. The manufacturer company explains that the inter-organizational relationship with the wholesale company gives them more influence to push their brands, and so the products, right through the distribution channels to the pet stores.
“We want to be a challenger for the dog and cat segment in every market we are operating in. For animals like birds, horses, pigeons and rodents we want to be the no. 1 brand. In order to accomplish this, we (partly) buy wholesale companies within each market. This wholesale companies give us the possibility to bring our company to no. 1 positions. We choose this wholesale companies based on the fact that we want to have our own sales force within that particular market by using that wholesale company. We are aware of the fact that this cooperation force us to
32
sell products from other suppliers also, but that’s something we accept.” (COO, manufacturer company)
This findings are giving more clearance about the motives for having an
inter-organizational relationship. Because the manufacturer company is now been able to influence the stores by convincing them to sell their products. The mission to be the no. 1. company or challenger of all different kind of brands should be accomplished by using this distribution channels. So not only within the Netherlands they bought a wholesale company, furthermore they bought several wholesale companies on foreign markets also. The COO explains that the Netherlands were an exception compared to other markets because the acquired wholesale company had two warehouses. He argues that this is a lot for a small country like the
Netherlands and therefore they searched for a solution to get one efficient warehouse. This is one of the reasons why the new owner is attracted, the COO explains this further by saying that they could create a more efficient warehouse and also additional market share by selling more products to their wholesale companies. Moreover they have now access to the franchise pet stores of the pet store corporation and they could use them to sell their brands as well.
“The reason to start the joint-venture is that we were aware of the fact that 4000 sku’s weren’t enough to be a total distributor where pet stores could buy all their products they need. We should add more brands, more types of products into our assortment. At the other hand, this increase of sku’s will lead to an even more complex logistic system which isn’t our core business. Prior to the joint venture we had 2 different warehouses in the Netherlands which wasn’t efficient. So to
combine all this issues we have decided to cooperate with another company in order to combine our logistics and to increase our assortment. Moreover we have had in mind to introduce our products within big franchise pet companies which is also accomplished by entering the joint-venture with this pet store corporation.” (COO, manufacturer company)
The strategic movement from an cooperation between the manufacturer and our company only to a dual owner structure with the pet store corporation is been done in order to accomplish a more extensive assortment, to sell more brands than before. (CEO, wholesale company)
33 So the joint-venture gives the manufacturer the possibility to increase their assortment and make their logistic process more efficient. This finding gives a clear motive why the joint-venture is of additional value for the inter-organizational relationship compared to the intra-organizational relationship before. The pet store corporation bought their 50% share because they want to increase their negotiation power regarding their suppliers. The
inter-organizational relationship creates a larger market share regarding the purchase department because now the manufacturer and pet store corporation could combine their purchases. Moreover they could create synergy as well by having a larger warehouse department. This finding supports the theory of Colleti et al. (2005) because the inter-organizational
relationship would create synergy for both owners.
4.4 Structure of the MCS
Within the inter-organizational relationship there is made use of key performance indicators (KPI) in order to monitor the wholesale performances. The most important KPI are: revenues, margin, costs per pallet, % of non-deliveries and the amount of different type of items per order. These KSF are been discussed every week within the Petit Committee and every month within the Grand Committee. The Grand committee is used to evaluate the strategic decisions and to determine the budgets while the Petit Committee is used to analyze the results of last week compared to budgeted results.
“The meetings with the “Petit Committee” are used to evaluate the financial performances which are compared to the budgets made at the beginning of the year. This is been accomplished with presence of the internal and external auditor within the “Grand Committee”.” (COO, manufacturer company)
“This is the weekly performance report, we use the budgets and actuals to evaluate if we met our targets and if not which product group or brand doesn’t met the targets. This gives us information about how we can find the cause of a margin increase/ decrease. Because when a margin of a certain group is for example decreases we investigate that particular group in order to find a more detailed cause. (CEO, Wholesale Company & Weekly performance report).
