The influence of safeguarding and coordination controls on goodwill trust and relational risk in strategic alliances

The influence of safeguarding and coordination controls

on goodwill trust and relational risk in strategic alliances

By

Anouk van Berkum S2341387

MSc BA – Organizational & Management Control Faculty of Economics and Business

University of Groningen

Supervisor: A. Rehman Abbasi Co-assessor: Dr. D.P. Veltrop

22-01-2018

2 ABSTRACT

In this research it is investigated what the influence of the two function of formal controls - safeguarding and coordination - is on goodwill trust. Furthermore, it is researched how formal controls and goodwill trust act as a mechanism to mitigate relational risk in strategic alliances. There are still inconsistencies in the literature about the relationship between trust and control and how they influence alliance performance. This research adds to this debate by taking into account the different functions of formal control and distinguish between dimensions of trust. Surveys were conducted to gather quantitative data, resulting into a final sample of 78 respondents. With this data set, a multiple regression analysis was conducted. The results show that safeguarding controls and coordination controls have different effects on trust, which can be a reason for the inconsistencies in the current literature. The assumed negative relationship between safeguarding controls and relational risk turned out to be positive. Therefore, goodwill trust is the preferable mechanism in mitigating relational risk. These findings add to the current literature and are interesting for managers who are responsible for managing the relationship with a partner firm.

3

TABLE OF CONTENT

Relationship between goodwill trust and relational risk ... 7

Formal control ... 8

1. Safeguarding function ... 9

Relationship between safeguarding and relational risk ... 9

Relationship between safeguarding and goodwill trust ... 10

Relationship between safeguarding and relational risk mediated by goodwill trust ... 12

2. Coordination function ... 13

Relationship between coordination and goodwill trust ... 13

Relationship between coordination and relational risk mediated by goodwill trust ... 15

Conceptual model ... 15

METHODOLOGY ... 16

Data collection ... 16

Measurement ... 16

Analysis ... 17

Consistency, validity and reliability ... 18

Assumption checking ... 19 RESULTS ... 19 Mediation... 20 DISCUSSION... 22 CONCLUSION ... 24 REFERENCES ... 27

4 INTRODUCTION

The past decades have been characterized by the increase of strategic alliances (Coletti, Sedatole, & Towry, 2005; Tomkins, 2001). Strategic alliances are interorganizational relationships between independent firms to share skills, knowledge and resources (Schilke & Lumineau, 2016). Due to globalization and enhanced competition, many organizations have problems with developing and maintaining the skills and expertise necessary to compete successfully (Langfield-Smith & Smith, 2003). Strategic alliances can offer solutions for those problems, since strategic alliances provide ways of gaining access to those skills and competencies that are needed to compete effectively (Anderson, Christ, & Sedatole, 2014; Das & Teng, 2001).

Despite their popularity, strategic alliances appear to have a high failure rate (Anderson et al., 2014). According to Lunnan & Haugland (2008) the alliance termination rate lies between 30 and 70 percent. The existing literature names several reasons for this high failure rate. For example, Das & Teng (1998) suggest that a lack of cooperation in combination with opportunistic behavior of partners is an important cause. In addition, Langfield-Smith & Smith (2003) claim that one cause for the high failure rate is the high level of risk concerned with alliances. While alliances provide many advantages, they are vulnerable to failure because they are exposed to different types of risk (Coletti et al., 2005).

The risk that is unique for strategic alliances is called ‘relational risk’. This specific type of risk is defined as “the probability and consequences of not having satisfactory cooperation” (Das & Teng, 2001: p.253). Relational risk can arise due to the possibility for opportunistic behavior, by which a party prioritizes its self-interest at the expense of the other party (Vosselman & Van der Meer-Kooistra, 2009). According to Langfield-Smith & Smith (2003), using the appropriate governance mechanisms could reduce relational risk in a strategic alliance. The appropriate governance mechanism could be based on the use of controls or the use of trust. This choice is grounded in the discussion in the literature about the relationship between trust and control, and how they enhance the performance of the strategic alliances. The two opposing views are the substitutive perspective - where more trust results in less use of control and vice versa - and the complementary perspective - where a higher level of control leads to a higher level of trust (Dekker, 2004).

5 As mentioned above, the opposing views on trust and control as mechanisms to mitigate relational risk are already debated in the literature. For example, Das and Teng (2001) propose that both trust and control determine the perceived level of risk, but both in their own way. Control is used as a proactive approach to affect the behavior of the partner and therefore lower the chance of unpleasant outcomes. On the other hand, trust leads to lower risk without affecting the partner’s behavior, because trust already involves an positive attitude about the partner and they will therefore be less concerned with opportunistic behavior. Furthermore, de Man & Roijakkers (2009) suggest that the nature of the relationship between trust and control depends on the amount of risk in the situation. In a situation where relational risk is high governance based on control is required. On the other hand, when relational risk is low the use of a governance based on trust is proposed. Therefore, de Man & Roijakkers (2009) propose that control is the better option to mitigate relational risk.

The fact that there is still disagreement about how trust and control relate to each other and how they are related in mitigating relational risk, could be due to the different functions of formal control in the governance of strategic alliances (Caglio & Ditillo, 2008). This research will contribute to the debate in the literature by taking into account not only the type of control – formal control - but also the functions of formal control: safeguarding and coordination (Costa & Bijlsma-Frankema, 2007). According to Sanchez, Velez, & Araujo (2012), the two functions of formal control can have different or overlapping effects on trust. In addition, relational risk is identified as a main reason for the high failure rate of alliances. Therefore it is important to investigate whether a governance mechanism based on formal control or on goodwill trust is more useful in mitigating relational risk. This leads to the following research question:

RQ: How do the safeguarding and coordination function of formal control affect goodwill trust and relational risk in strategic alliances?

The goal of this paper is to investigate the influence of both types of formal control on goodwill trust, and the effect of both formal control and goodwill trust on relational risk. This research will contribute to the existing literature by not only looking at the type of control used in strategic alliances but also at the function of controls. This will result in a more comprehensive understanding of the relationship between formal control and goodwill trust, and will lead to a better understanding of how both concepts can be used to mitigate relational risk (Dekker, 2004). This research is also relevant to practitioners, by making it more clear how trust and control might mitigate relational risk. Managers can use the most appropriate governance mechanisms to decrease relational risk and therefore increase the chance of success of an strategic alliances.

6 Based on these hypotheses, a conceptual model will be presented. In section three, the methodology used in this research will be described, including the data collection and data analysis. In the fourth and fifth section, the results will be presented and discussed. The paper ends with a conclusion, limitations and suggestions for further research.

LITERATURE REVIEW

In this section, the key concept of this paper will be explained. First, the concepts of relational risk, formal control and goodwill trust will be discussed. Second, the relationships between these concepts will be reviewed based on underlying theories. Finally, hypotheses are developed and illustrated in the conceptual model.

Relational risk

Strategic alliances are quite unstable due to their exposure to different types of risk. The two main risks identified in the literature are ‘performance risk’ and ‘relational risk’ (Coletti et al., 2005; Das & Teng, 2001; Anderson et al., 2014). Performance risk is defined as the probability that the collaboration will not reach its objectives despite the full cooperation of the firm and the partner firm. The main source of this risk lies within changes in the market and is therefore not a risk particular for strategic alliances. The other type of risk is relational risk. This is defined as the probability that the objectives of the collaboration will not be reached as a consequence of a lack of cooperation. In this paper, the focus will be on relational risk because it is specifically important in strategic alliances (Coletti et al., 2005).

The source of relational risk lies within the possibility of opportunistic behavior of the firm and the partner firm. Opportunism can be defined as: “self-interest seeking with guile” (Caniëls & Gelderman, 2010; Jap & Anderson, 2003). Opportunistic behavior arises when the firm puts its own interest above the interest of the alliance (Das & Teng, 2001; Coletti et al., 2005). Due to the nature of alliances, a social dilemma arises. In this case that is a situation where acting cooperative and not putting the firm’s own interest first, goes against the rational, but acting opportunistic leads to suboptimal outcomes (Coletti et al., 2005). Therefore, conflicts can arise because the individual interests of a firm are not naturally consistent with the interests of the alliance. Opportunistic behavior can be illustrated in distorting information, shirking, cheating and violating agreements and so on (Caniëls & Gelderman, 2010).

Trust

7 on the interorganizational level is most relevant here. Organizations are a collection of individuals and therefore interorganizational trust represents an collection of the individual’s level of trust that exists between multiple individuals and at multiple hierarchical levels across both organizations in the relationship (Ganesan & Hess, 1997).

Nevertheless, even scholars specifically focusing on interorganizational trust use different definitions in their papers. The definition of Gambetta (1988) entails the positive expectations towards the partner in a situation characterized by risk. Cotelli et al. (2005) use trust in the broad sense by conceptualizing it as the perceived likelihood that a partner will cooperate in absence of any economic incentives to do so. Vosselman & Van der Meer-Kooistra (2009) consider the willingness to accept vulnerability, to be at the core of trust. Besides the difference in the literature, most authors seem to agree that ‘positive expectations’ and ‘the willingness to become vulnerable’ are critical elements of trust (Bijlsma-Frankema & Costa, 2005). Therefore, in this research the definition given be Rousseau, Sitkin, Burt, & Camerer (1998) is applicable. They offer a multidisciplinary definitions that contains both elements. This definition states that: “trust is a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another” (Rousseau et al., 1998: p. 1998).

Besides different levels of trust, different dimensions of trust are also identified in the literature. Sako (1992) has identified three dimensions of trust. First, trust based on contracts, where trust is based on agreements that are supported by universal ethical codes. Second, competence trust, which is the expectation in a partner firms’ competences in technical and managerial matters. Third, goodwill trust is about the expectation of commitment to each other. Several scholars (Das & Teng, 1998, 2001; Dekker, 2004)have associated competence trust with confidence in the partner’s capabilities, skills and know-how. On the other hand, goodwill trust is associated with expectations about the partner’s responsibility and behavior in unexpected situations (Vélez, Sánchez, & Álvarez-Dardet, 2008). This research will only focus on goodwill trust, since goodwill trust is about the expectations of the intentions of the other party and could therefore be useful to mitigate relational risk (Nooteboom et al., 1997).

Relationship between goodwill trust and relational risk

In the existing literature, several ways are mentioned in which goodwill trust could affect relational risk. For example, Şengün & Wasti (2007) state that trust in general could reduce risk by enhancing mutual commitment and therefore results in better problem solving. This view is shared by Lui & Ngo (2004) who claim that in goodwill trust the expectations about the behavior of the partners are based on mutual perception.

8 the other party this firm provides its partner firm with a benefit. According to SET, when a firm provides its partner with a benefit, it should trust that the partner will reciprocate. Over time, multiple beneficiary actions of reciprocation will create trust about the intentions of the other party. Consequently, the process of creating trust creates obligations between the organizations (Blau, 1964; Homans, 1958; Lambe, Wittmann, & Spekman, 2001). Because of this, the firms are less likely to prioritize their self-interest above the self-interest of the alliance.

As already mentioned, Lui & Ngo (2004) state that goodwill trust is based on mutual perception. A high level of mutual perception can lead to both parties developing a stronger bond for each other, and as a result the level of commitment will increase (Morgan & Hunt, 1994; Shapiro, Sheppard, & Cheraskin, 1992). The idea that trust affects relational risk through commitment is part of the trust-commitment theory. Trust is an important determinant for commitment in a relationship. One underlying reason for this positive relationship could be, that a relationship based on trust is so highly valued that both firms wish to commit themselves to the relationship (Spekman, 1988). Commitment encourages both parties to stay with the existing partner and receive long-term benefits from that relation. Therefore, high commitment lowers the chance of choosing for short-term gains, by acting opportunistic, because they value the relationship too much and expect to deal with this partner firm for the foreseeable future (Joshi & Stump, 1999; Morgan & Hunt, 1994).

This line of reasoning is also supported by the relational exchange theory (hereafter: “RET”). This theory sees trust as a critical component for fostering and maintaining value-increasing relational exchanges (Lado, Dant, & Tekleab, 2008). Due to a higher level of commitment, the parties view the relationship as valuable (Morgan & Hunt, 1994). Therefore, the parties might initiate to strengthen the relationship through investment of material and non-material resources. This could include the exchange of tacit knowledge, the development of loyalty and an orientation of gaining benefits through collaboration (Gulati, Khanna, & Nohria, 1994; Koza & Dant, 2007; Lorenzoni & Lipparini, 1999).

In sum, goodwill trust can affect relational risk by creating obligations through a process of reciprocal actions, which is supported by the SET. In addition, goodwill trust can enhance commitment in a relationship and commitment can decrease relational risk by lowering the chance that the partner firm chooses for short-term gains. This is supported by both the RET and the trust-commitment theory. This results into the following hypothesis:

H1: Goodwill trust will negatively influence relational risk.

Formal control

9 often made distinction in the literature is between informal and formal control. Whereas informal control relates to informal cultures and structures and is essentially based on mechanisms that encourage self-regulation (Ouchi, 1979), formal controls contain contractual agreements and implemented organizational mechanisms for cooperation (Dekker, 2004; Sanchez et al., 2012). Moreover, formal controls depend the principle of specification. In other words, actions that lead to successful cooperation can be specified ex ante. Formal controls are useful to mitigate different types of risks, especially relational risks. Formal controls can reduce relational risk by changing the incentives for opportunistic behavior (Coletti et al., 2005). As mentioned earlier, the gap in the current literature concerns the different functions of formal control in the governance of strategic alliances (Caglio & Ditillo, 2008), therefore this research focus solely on formal controls.

In the literature a distinction has been made between two functions of formal control: the safeguarding role and the coordination role. Most researchers focus only on the safeguarding function of formal controls (Sánchez, Vélez, & Ramón-Jerónimo, 2012). However, the coordination function has gradually received more attention over the past few years (Costa & Bijlsma-Frankema, 2007). The two functions of formal control, coordination and safeguarding, can have different or overlapping effects on trust (Sanchez et al. 2012). Below, the two functions of formal control will be discussed separately and their influence on goodwill trust and relational risk are hypothesized.

1. Safeguarding function

The safeguarding function of formal control consist of systems of monitoring, sanctioning and rewarding. Monitoring is a critical element in the safeguarding function because it provides both parties with the possibility to determine whether there have been deviations from the rules both parties agreed on (Bijlsma-Frankema & Costa, 2005; 2007). The safeguarding function finds its basis in transaction costs economics (hereafter: “TCE”), which suggest that when collaborating firms make investments that are specifically of use for the alliance, the chance of opportunistic behavior arises. The firms need to protect their investments from being appropriated by the other party, who has potential for behaving opportunistic (Caniëls & Gelderman, 2010; Dekker, 2004).

Relationship between safeguarding and relational risk

10 According to Lui & Ngo (2004) contracts can safeguard against opportunistic behavior through two mechanisms. Firstly, contracts can include penalties for when a party violates the agreement. It is therefore more costly to pursue activities that are in the self-interest of a party and not in the interest of the collaboration. Secondly, contracts increase the transparency and decrease the ambiguity in a relationship by clearly defining the contractual specifications and the objects of monitoring. Caniëls & Gelderman (2010) agree with the perspective of Lui & Ngo (2004) and they add a third mechanism. According to their paper, contracts can also negatively affect opportunism by setting conditions about how conflicts must be handled.

Another type of formal control that can be used to safeguarding is behavioral control. Behavioral control is a form of formal control and can be defined as: “control based on direct personal surveillance” (Ouchi & Maguire, 1975: p. 559). Das and Teng (2001) have developed the proposition that behavioral control can be used to mitigate relational risk. They rely on the combined theory development of (Eisenhardt, 1985; Ouchi, 1979; Thompson, 1967). This theory suggests that the choice of a useful control mode depends on two task characteristics: output measurability and task programmability (Eisenhardt, 1985). A situation where output measurability is low and programmability is high, is equal to a situation characterized by relational risk. In an alliance, it is difficult to measure the outcomes of opportunistic behavior and conflicts in an objective way (Das & Teng, 2001), and because relational risk is all about dishonest behavior, it is difficult to measure the exact consequences of these actions. Therefore, behavioral control is useful because it focuses on the process that turns appropriate behavior into desirable output (Das & Teng, 2001).

Taken everything into account, there are several ways in which formal controls with safeguarding functions can affect relational risk. First, monitoring and sanctioning can reduce the chance of opportunistic behavior. Furthermore, contracts and behavioral control can be used to safeguard against relational risk. This results in the following hypothesis:

H2: Formal controls with the function of safeguarding will negatively influence relational risk.

Relationship between safeguarding and goodwill trust

11 authors is that formal controls can provide more objective evidence and do not necessarily cause inflexibility and leads to situations of mistrust.

One way to theoretically understand the relationship between formal control and goodwill trust is through the information processing view. An important aspect of the information processing view is the framing approach. In the framing approach it is stated that organizational mechanisms shape the manner in which problems are understood (Schilke & Lumineau, 2016). In the framing approach, the decision

frame has a powerful influence on the decision maker and this decision frame is built on environmental

cues. In other words, in the basic situation the organization wants the collaboration to work and therefore frame the partner’s intentions as trustworthy. When there are formal control mechanisms in play, this can change the basic perception of the partner’s intention, because it is now more rational for the partner to behave trustworthy, due to the formal controls in place. Therefore, implementing a control system can have a negative influence on perception, by promoting distrust. This new frame increase the chances for opportunistic behavior on both sides (Coletti et al., 2005).

Argyris (1952) takes this idea a bit further by incorporating the principle of reciprocity. He states that the use of control mechanisms suggest that one partner does not trust the other. Because trust is characterized by reciprocity, the other partner could think: ‘if you do not trust me, I will not trust you’. Consequently, this will lead to a vicious cycle towards a situation of distrust. By applying this logic, the use of control mechanisms will decrease the level of goodwill trust in alliances.

This is in line with the reasoning of Inkpen & Currall (2004). They recognize the argument of the sociological approaches for studying trust. The sociological approaches (Shapiro, 1987; Sitkin & Roth, 1993) argue that the use of formal controls diminishes partner trust because they supply an alternative way for trustworthiness. Inkpen & Curral (2004) focus more on formalization in formal controls and how this limits the discretion of the parties. “Therefore, if Firm A interprets Firm B’s trustworthy actions as being largely a function of formal controls as opposed to freely made choices to be trustworthy, then Firm A will discount Firm B’s apparent trustworthiness” (Inkpen & Curral, 2004: p. 591). Ergo, formal controls impede the development of goodwill trust through formalization, by questioning the intention of the partner firm.

12 same argument by stating that formal control undermines trust by lowering the autonomy of the participating members due to the employment of strict rules and objectives. Because of this, a situation of mistrust is created.

In sum, the way in which formal controls effect goodwill trust can be explained by using the framing theory where formal control supplies a different reason to act trustworthy and therefore the intentions of the partner can be questionable. In addition, formal controls can create a situation of mistrust between partners, due to of the principle of reciprocity and by lowering the autonomy of the partner. Therefore, the use of formal controls can lead to a decrease in goodwill trust. This leads to the following hypothesis:

H3a: Formal controls with the function of safeguarding will negatively influence goodwill trust.

Relationship between safeguarding and relational risk mediated by goodwill trust

As mentioned earlier, in this research safeguarding controls and goodwill trust are assumed to have a substitutive relationship in affecting opportunistic behavior and enhancing alliance performance. The increase of one concept results in a decrease of the other. However, hypothesis H1 and H3a are stating that both safeguarding and goodwill trust lead to an decrease in relational risk. In these hypotheses only the direct effect of both concepts on relational risk is discussed. Although, it could be argued that there is not only a direct effects on relational risk, but also an indirect effect. It could be argued that the influence of safeguarding controls on mitigating relational risk is negatively influenced by goodwill trust, because safeguarding also decreases goodwill trust.

This indirect effect could be explained by the framing approach and the trust-commitment theory. As mentioned above, the framing approach states that by using safeguarding controls a situation of mistrust will be created (Coletti et al., 2005; Agryris, 1952). According to the trust-commitment theory, high trust is an important determinant for commitment in the relationship. Therefore, low goodwill trust leads to low commitment. Commitment encourages both parties to stay with the existing partner and receive long-term benefits from that relation (Joshi & Stump, 1999; Morgan & Hunt, 1994). Therefore, a lack of commitment increases the chances that the partners will choose short-term gains over the long-term benefits of the alliance, by behaving opportunistic. When the chance of opportunistic behavior increases, the level of relational risk increases as well.

In sum, safeguarding controls can be used to mitigate opportunistic behavior and therefore relational risk, but at the same time they decrease goodwill trust and by decreasing goodwill trust the chance of relational risk is increased. This leads as to the following hypothesis:

13

2. Coordination function

Besides the safeguarding function, formal controls can also be used to coordinate the tasks of the partners (Caglio & Ditillo, 2008; Dekker, 2004). In this function, formal controls can be interpreted as a means to pursue the alignment of activities. The mechanisms of safeguarding - monitoring, sanctioning and rewarding – may be sufficient to achieve cooperation by decreasing relational risk, but they are not sufficient to achieve coordination. This is because the source of the problem is different (Gulati, Lawrence, & Puranam, 2005). Problems for coordination “arise due to the cognitive limitations of individuals that deny them comprehensive knowledge of how others will behave in situations of interdependence, and how they are interdependent with others” (Gulati et al. 2005: p. 419). In line with this view, Vélez et al. (2008) have defined the coordination function as a function that generates, updates and shares information. This information is useful for reducing the uncertainty that arises from the division of work and the differences in capacity and knowledge. Moreover, this information can be used for planning, decision making, problem solving and communicating common goals. Furthermore, the goal of coordination is the integration of activities in the way it will reach the objective of the alliance. Coordination is needed to achieve this goal because coordination mechanisms help design the way of communication and the division of the decision rights (Mellewigt, Madhok, Weibel, 2007).

In the existing literature most researchers have mainly focused on the safeguarding function of formal controls, which has its basis in TCE. However, the recent rise of the resource-based view (hereafter: RBV) does involve the coordination function of formal control. The RBV emphasizes the process of value creation, which depends on the joint coordination of activities and the problems with the integration of the distributed activities (Mellewigt et al., 2007). The RBV changes the perspective of value appropriation, which has been the dominant theme in the literature, to the perspective of value creation (Nahapiet & Ghoshal, 1998). In order to create value, the firms have to pool their resources and decide on task performance. This and other issues within an strategic alliances need to be coordinated. So, the process of value creation focuses on the coordination function of control.

Relationship between coordination and goodwill trust

14 that are associated with the safeguarding function. Therefore, it could be argued that the coordination function increases the level of goodwill trust.

As mentioned above, coordination enhances the communication between the parties, and therefore this is one mechanism through which goodwill trust can be affected. Morgan & Hunt (1994) mention that communication stimulates trust by aligning expectations and assisting in solving conflicts. In addition, Vélez et al. (2008) argue that controls with a coordination function can be useful for sharing information and communication, which are viewed as important determinants of trust. In the literature there is empirical evidence on the positive relationship between communication and trust (Anderson, Lodish, & Weitz, 1987; Anderson & Weitz, 1989).

This line of reasoning can also be found in the literature specifically focusing on contracts (Schilke & Lumineau, 2016). Coordination fosters regular information sharing between partners and therefore provides a way through which these organizations can align their expectations (Argyres, Bercovitz, & Mayer, 2007; Gulati et al., 2005). This results in a common understanding of the goals of the alliance and the responsibilities of both partners in achieving these goals. Moreover, “frequent communication may also promote the development of routinized interactions and shared language that can make it easier for the parties to ensure they meet each other’s needs” (Schilke & Lumineau, 2016: p.7). As a result of aligned expectations and frequent interaction, the chance of misunderstandings about the intent of the other party should decline, which results in more goodwill trust (Gulati & Singh, 1998; Mayer & Argyres, 2004).

Another mechanism, mentioned in the literature, through which coordination affects goodwill trust is joint conflict resolution. Malhotra & Lumineau (2011) argue that by creating channels through which conflicts in viewpoint will be resolved, coordination helps to mitigate possible misunderstandings about the intention of the other firm. Consequently, coordination promotes goodwill by conflict resolution (Vlaar, Van den Bosch, & Volberda, 2007). Besides that, trust may evolve over time through the process of learning (Langfield-Smith & Smith, 2003). Schilke & Lumineau (2016) argue that increased partner learning is another effect of frequent communication. Increased learning makes it easier to predict behavior and motives of the partner and therefore decreases skepticism and paranoia about the intentions of the other firm.

15 goodwill trust positively. Besides, coordination increases information sharing, joint conflict resolution and learning, which are all positively related to the development of goodwill trust.

H4a: Coordination controls will positively influence goodwill trust.

Relationship between coordination and relational risk mediated by goodwill trust

There is not expected to be a direct relationship between coordination controls and relational risk. However, as mentioned above, coordination controls have a positive influence on goodwill trust. By positively influencing goodwill trust, the coordination controls indirectly negatively affect relational risk. Therefore, goodwill trust can be viewed as the underlying connection between coordination controls and relational risk. Since a mediator helps to clarify the nature of the relationship between the independent and dependent variable, it can be argued that there is a mediation relationship here (MacKinnon, 2008). This results into the following hypothesis:

H4b: Goodwill trust will mediate the relationship between coordination controls and relational risk.

Conceptual model

16 METHODOLOGY

In this section of the report, there will first be elaborated on how the data was gathered. Next to this, it will be discussed how the variables used in this research were measured and analyzed.

Data collection

For the data collection in this research I made use of an already existing survey provided by my thesis supervisor. The survey is carefully developed over the last years and very well suited for this research. The data collection happened in the Netherlands and Germany. The first step in the collection of the data is to invite companies to participate in the research. In order to be suited for this research, participating companies were required to have a contractual agreement with another firm. The companies were contacted via mail, telephone and LinkedIn.

The respondents, who filled out the survey, should have a high degree of familiarity with the operations of the alliance with the partner firm, and preferably have a managing position. Therefore, most respondents were supply chain managers and purchasers, since they have a lot of knowledge about the relationship with the partner firm. After the respondents agreed to participate, an appointment was scheduled for filling out the survey. The researcher was required to attend the appointment to answer any potential questions.

In total, 188 firms where contacted of which 27 responded that they did not meet the requirements, or that they did not want to participate. In the end, 34 interviews were conducted, which leads to a respondent rate of 18.09%. However, the data collection was extended with data collected by my supervisor and data that was collected by students from last year using the same survey. The final sample consisted of 78 respondents.

Measurement

As mentioned above, the survey was provided by my thesis supervisor. Most of the questions were measured on a 7-item Likert-type scale, where 1 represented “strongly disagree” and 7 represented “strongly agree”. The variables used in this research were measured in the survey as follows.

Relational risk: This variable was measured in the survey with fourteen questions, which are based on

the previous research of Das & Teng (2001b). After conducting a factor analysis, Das & Teng (2001b) used ten out of the fourteen questions for measuring relational risk. In line with Das & Teng (2001b), the four deleted questions were also excluded from this research.

Goodwill trust. Goodwill trust is all about the intentions of the partner. In the survey nine items were

17 Wasti (2007). Their sample consisted of six items, and therefore the items that were not consistent with the research of Sengun & Wasti (2007) were removed from the sample.

Functions of formal controls. The two functions of control – coordination and safeguarding – are

measured by items about the purpose of the control systems. In the survey six items were used to measure the purpose of control. These items were developed by my thesis supervisor. Three items were deleted from the sample because they did not measure either the safeguarding function or coordination function.

However, the variables could also be influenced by other factors outside the model (Poppo & Zenger, 2002) and therefore control variables are included. The following control variables were used in this paper: relationship type, relationship length and mutual dependence. First, relationship type was used as a control variable because “the type of alliance has significant implications for the roles of trust and control” (Das & Teng, 2001: p. 268). In the survey, respondents could select a buyer-supplier relationship, joint venture, outsourcing, research & development (R&D), or another kind of relationship.

Relationship length was used as a control variable because of several reasons. First of all, when there is a long-term relationship between the partners, the chance of opportunistic behavior decreases (Lai, Tian, & Huo, 2012). One underlying reason for this could be shared history, which makes the behavior of the partner easier to predict (Selnes, 1998). Moreover, previous experience with the partner firm can affect the effectiveness of the control mechanisms in place (Fryxell, Dooley, & Vryza, 2002). The relationships length was measured by the number of years the partners have been working together.

The third control variable, mutual dependence, was adopted from the study of Şengün & Wasti (2007). They have defined mutual dependence as the importance of one party for the other party’s business survival. So, when a party highly depends on another party they are less likely to behave opportunistically. Furthermore, high interdependence together with high trust will result into the desire to continue the strategic alliance (Izquierdo & Cillán, 2004). In the survey, the items of partner’s dependence on the focal firm and the focal firm’s dependence on the partner were used to measure this variable.

Analysis

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Consistency, validity and reliability

Before performing a regression analysis it is important to check the data for internal consistency, construct validity and reliability. Internal consistency is false when there is an apparent correlation among variables generated by their common source. False internal consistency happens due to common method variance (CMV), which occurs when information about the dependent and independent variable are collected from the same person at the same time (Chang, van Witteloostuijn, & Eden, 2010). The most common test to check for CMV is Harman’s single factor test. A factor analysis was performed with only one factor and no rotation. The results show that this factor explains 40.3% of the variance. This means that one factor does not explain more than 50% of the variance, and therefore CMV is not a pervasive issue (Chang et al., 2010).

Next, construct validity is defined as the extent to which a measuring instrument measures what it is intended to measure (van Aken, Berends & van der Bij, 2012) . Before construct validity can be measured with an exploratory factor analysis (EFA), the sample adequacy must be assessed using a Kaiser-Meyer-Olkin (KMO) test and the Barlett’s sphericity test. The KMO score of .794 falls within an acceptable range (Şengün & Wasti, 2007). In addition, the Barlett’s sphericity test is significant (p = .000). This indicates that the data is sufficient and therefore an exploratory factor an EFA can be conducted on the data.

The EFA was performed with a varimax rotation and five components. Five components were chosen because the scree plot showed that the ‘elbow curve’ ended around five components, and the naturally bend in the curve is usually the number of factors necessary (Costello & Osborne, 2005). The varimax rotation was chosen because it produces factors that are uncorrelated and therefore the results are more easily interpretable (Costello & Osborne, 2005). Furthermore, loadings with small measurements (r < .420) were deleted and cross loading with a differences smaller than 0.2 were seen as negligible.

As a result of the EFA the following items about relational risk were removed: RTLRISK_05 for loading into the wrong component, RTLRISK_06 loaded into two components, RTLRISK_09 loaded in no component at all. In addition, three items of goodwill trust were removed for loading into the wrong component: GWILTRUST_03, GWILTRUST_06 and GWILTRUST_08. The results of the EFA after the items were deleted can be found in Appendix A.

19

Assumption checking

Except for validity and reliability, by performing a regression analysis the data should also be checked for normal distribution, linear relationships, homoscedasticity and outliers (Osborne & Waters, 2002). First, it is assessed whether the residuals are normally distributed by using a histogram. The histogram shows that the residuals generally follow the normality line, and therefore it can be assumed that the data is normally distributed. Second, an assessment was made whether the independent variables are linear related to the dependent variable, by using a P-P plot. This is necessary because only if the relationships between the independent and dependent variables are linear in nature, a multiple regression can measure the relationship (Osborne & Waters, 2002). The P-P plot shows that the residuals generally follow the linear line, so it can be assumed that the variables have a linear relationship.

Third, it is required to check for homoscedasticity by using a scatterplot. The scatterplot shows that the residuals are scattered randomly, therefore it can be assumed that the data is homoscedastic. Fourth, it is necessary to check the data for outliers. The data was tested for outliers by using the Mahalanobis distance test. There are no outliers identified in the data because the probability of the Mahalanobis distance score are all higher than .001.

RESULTS

To test the hypotheses in this paper, a multiple regression analysis is performed. Table 1 gives an overview of the descriptives of all variables used. The two highest correlations are between safeguarding and relational risk (r = .443, p < 0,05) and between goodwill trust and relational risk (r = -.351, p < 0.05). Because there is significant correlation between some variables the data is tested for multicollinearity. This occurs when two or more independent variables are highly correlated (Grewal, Cote & Baumgartner, 2004). Multicollinearity is problematic when the tolerance is less than 0.2 and the variance inflation factor (VIF) is above 10. With the lowest tolerance factor of 0.811 and the highest VIF of 1.156 multicollinearity is not a problem (Kleinbaum, Kupper & Muller, 1988).

20 Table 1. Descriptive statistics

Hypothesis 1 proposed a negative relationship between goodwill trust and relational risk. The results in model 3 shows that this relationship is negative and significant (β = -.307, p < 0.05) and hypothesis 1 is supported. In hypothesis 2 it was argued that safeguarding controls have a negative influence on relational risk. The results of this hypothesis can be found in model 2. Model 2 shows that safeguarding controls significantly influences relational risk (β = .347, p < 0.01). However, this relationship is not negative as hypothesized and therefore hypothesis 2 is rejected.

Hypothesis 3a proposed that formal controls with the function of safeguarding negatively influence goodwill trust. The results of this test are shown in model 4. Hypothesis 3a is supported with a significant negative influence of safeguarding controls on goodwill trust (β = -.149, p < .10). In hypothesis 4a it was assumed that coordination controls have a positive influence on goodwill trust. The results presented in model 4 show that this relationship is positive and highly significant (β = .267, p < .01) and therefore hypothesis 4a is supported.

Mediation

Hypothesis 3b and 4b contain a mediation variable. To establish a relationship with a mediation variable there are some conditions that must hold (Baron & Kenny, 1986):

(1) The independent variable must affect the dependent variable; (2) The independent variable must affect the mediator;

(3) The mediator must affect the dependent variable.

21 Table 2. Regression results

Hypothesis 2 was already rejected because the results did not show a negative relationship as hypothesized, and therefore condition (1) is not met. Condition (2) is equal to hypothesis 3a which was already supported and therefore condition (2) is met. Condition (3) is equal to hypothesis 1, which was already supported and condition (3) is met. Not all the conditions are met because of the rejection of hypothesis 2, meaning it cannot be argued that goodwill trust has a mediator function in this relationship and therefore hypothesis 3b is rejected.

22 condition are met and therefore it can be argued that goodwill trust functions as a mediator in the relationship between coordination controls and goodwill trust.

Model 2 and 3 illustrate further evidence of the mediating relationship. For goodwill trust to act as a mediator, the influence of coordination controls on relational risk should be lower when goodwill trust is involved. Comparing model 2 and 3 shows that the influence of coordination controls on relational risk lowers with .052. In addition, the influence changes from significant to not significant when goodwill trust is involved, which indicates a full mediation (Baron & Kenny, 1986). Furthermore, the test of Sobel (1982) was used to measure whether the mediation is statistically significant. The results of the test (z = -2.06, p < .05), show that the mediation is significant. Taken together, these results show support for hypothesis 4b.

DISCUSSION

In this study the influence of safeguarding and coordination controls on goodwill trust and relational risk was researched. First, it was assumed that safeguarding controls have a negative influence on goodwill trust and coordination controls have a positive influence on goodwill trust. These assumptions are both supported by the significant results. As a consequence, it is shown that both functions of control have a different influence on goodwill trust. The results of this research are therefore important for the literature, because it leads to a more nuanced view about the relationship between trust and control.

Two possible reasons of why there are still inconsistencies in the results of papers researching the relationship between trust and control are: (1) whether the different functions of formal control are included or not, and (2) the contingency factors present in the research. For example, Sengun & Wasti (2007) concluded in their paper that they found support for the complementary relationship between formal controls and trust. However, they focused on output control – a type of formal control used to monitor and safeguard outcomes – and did not include the coordination function of control.

On the other hand, Vélez et al. (2008) make a distinction between the monitoring and coordination functions of formal control and argue the following: “who regard MCSs as an alternative to trust focus only on their monitoring function, confusing it with the whole” (p.973). However, the research of Velez et al. (2008) only focused on alliances in their mature phases. Both researches give contradictory results, which could be due to the above-mentioned reasons.

23 is left out of this discussion. The focus of this research lies on whether safeguarding controls or goodwill trust are preferable in mitigating relational risk.

The relationship between safeguarding controls and relational risk is argued to be negative, because safeguarding controls are used to decrease opportunistic behavior, which is the main source of relational risk (Das & Teng, 2001). However, the empirical results show a highly significant positive relationship between safeguarding controls and relational risk. In other words, when the use of safeguarding controls increases the chance on relational risk increases as well and safeguarding controls are therefore not useful in mitigating relational risk.

The underlying assumptions used in this research were among others based on the research of Colleti et al. (2005). They state that formal controls mitigate relational risk by changing the incentive for opportunistic behavior, by the use of monitoring and sanctioning. Earlier empirical research provides evidence for this assumption (Ittner, Larcker, Nagar, & Rajan, 1999)

How is it possible that this research shows a positive relationship between safeguarding controls and relational risk and thereby contradicts earlier research? One possible explanation for this is given by Brehm’s (1966) theory of psychological reactance. In general, Brehm (1966) argues that when individuals have their freedom constrained, they are likely to resist and take action to improve their position. This can be applicable in strategic alliances when one party introduces safeguarding controls to control the other party. The other party feels constrained by these controls and may turn to opportunistic behavior to improve its position.

Another possible explanation is that safeguarding is not fit to mitigate relational risk due to bounded rationality (de Man & Roijakkers, 2009). According to, Laaksonen, Pajunen, & Kulmala (2008) bounded rationality might make it more difficult to distinguish trustworthy partners from those who will act opportunistically. Due to bounded rationality firms are unable to implement control mechanisms that cover all possible future behaviors of the partner firm. These incomplete control mechanisms are not sufficient to control for opportunistic behavior and therefore need to be complemented with another mechanism (Dekker, 2004), for example: goodwill trust.

24 As a consequence of the results, goodwill trust can be seen as the preferable governance mechanism in mitigating relational risk. However, what if goodwill trust and formal control are in play at the same time? It is important to investigate this, because the isolated use of trust or control is not representative of a real-world situation in which different governance mechanisms are employed at the same time (Caniëls & Gelderman, 2010). In this study is was assumed that the presence of both formal controls and goodwill trust led to an indirect relationship between formal control, goodwill trust and relational risk.

Focusing on the relationship between safeguarding and relational risk, it was assumed that goodwill trust acts as a mediator. It was empirically supported that safeguarding controls negatively influence goodwill trust, which indirectly has a positive influence on relational risk. However, this relationship is not a mediating one. The reason why there is no case of a mediator, is because there is no evidence of a significant negative relationship between safeguarding controls and relational risk. Therefore, goodwill trust cannot be the underlying explaining mechanism of a relationship that does not exist.

Additionally, the indirect relationship between coordination controls, goodwill trust and relational risk was expected to be a mediating one. The results show empirical support for this assumption and therefore goodwill trust can be viewed as the concept that clarifies the relationship between coordination controls and relational risk. However, in this research it was not expected to see a significant direct relationship between coordination and relational risk, but the results showed evidence of this relationship. To further theoretically investigate this is beyond the scope of this research.

CONCLUSION

In this section of the paper, the research contributions and managerial implications of this research paper will be discussed. Furthermore, some limitations will be mentioned and directions for future research are given.

Research contributions

25 This research shows that safeguarding controls and coordination controls have different effects on goodwill trust and this can clarify the inconsistencies in the results of the current literature. Especially, the relationship between safeguarding controls and goodwill trust still leads to contradictory results in empirical research. This could be due to whether the functions of formal control are included in empirical researches, or due to contingency factors included in the researches.

Furthermore, this research shows that the substitutive and complementary view are both possibilities. Therefore, there is not one right conclusion and having inconsistencies in the results is not necessarily a bad thing. However, most scholars agree on the positive influence of coordination controls on goodwill trust (Dekker, 2004; Langfield-Smith & Smith, 2003; Velez et al., 2008).

The second contribution of this research is to test how formal control and goodwill trust are possibly helpful in mitigating relational risk. The results of this research show that goodwill trust is a preferable governance mechanism to mitigate relational risk in comparison to safeguarding controls. Since safeguarding controls have a positive influence on relational risk, they are not suitable as a mitigating mechanism. Goodwill trust shows a significant negative effect on relational risk. However, it could be possible to use formal controls to mitigate relational risk, but with the coordination function. In that relationship goodwill trust acts as a mediator through which coordination controls negatively influence relational risk.

Managerial implications

Besides interesting findings for the literature, this research also has some implications for managers who are responsible for maintaining the relationship with partner firms. First of all, when the goal is to develop a relationship where goodwill trust is the governing mechanism, it is best to minimize the formal safeguarding control in play. However, when there are formal control mechanisms installed for the purpose enhancing information sharing, decision making and communication between the partner firms, the goodwill trust in a relationship will increase.

It is advisable to use goodwill trust as the governing mechanism in the relationship with the partner firm, because goodwill trust decreases the chance of relational risk. Relational risk is identified as one of the main sources of failure of strategic alliances and by decreasing the chance of relational risk the performance of the alliances improves and the chance of failure decreases.

Limitations and direction for future research

26 was expanded with participants from last year, it still is considered small. This could affect the results of the study by decreasing reliability, generalizability and effectiveness.

Furthermore, all of the variables are measured with two or more items, excepts coordination. While PURPCON_03 and PURPCON_04 both loaded into the component of coordination, they were not compatible and therefore PURPCON_04 was removed from the data. By measuring coordination with only one item, the construct reliability of the research decreases.

Moreover, in this research formal control and goodwill trust are treated as static concepts, while they are subject to change over time. Alliances are dynamic relationships that need to evolve to be successful (Inkpen & Currell, 2004). In this dynamic relationship trust and control also change, but to take this into account was beyond the scope of this research. Therefore, including the changing nature of trust and controls into empirical research offers a possibility for future research.

Another direction for future research could be to theoretically investigate the direct relationship between coordination controls and relational risk. The results of this research show that there is a significant negative relationship between the two concepts, but this relationship was not hypothesized because of the lack of underlying theory. It could be interesting to investigate on what theoretical basis this relationship is based.

27

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