Trust, control and risk:
The trust-‐control-‐risk relationship in strategic
alliances
Master thesis, MSC BA – Organizational & Management Control
University of Groningen – Faculty of Economics and Business
June, 2014
Deni Nozic
Student number: 2405679
Folkingestraat 11
9711 JS Groningen
T: +31 (0)6 53520722
Email: deninozic88@gmail.com
Supervisors – University
1st supervisor: drs. J. (Jeltsje) van der Meer – Kooistra
ABSTRACT
This paper provides a review of the empirical and theoretical literature on the
trust, control and risk relationship that exists in strategic alliances. After a
thorough analysis of the concepts control, trust and risk, the underlying
relationships are presented and critically evaluated. The aim of this study is not
only to illustrate the trust, control and risk relationship, but also to shed a light
on the conflict that exists between different theoretical foundations and their
results. This paper highlights that some theories (like transaction cost
economics) may be flawed in strategic alliances, since they regard relational
aspects like trust and power as superfluous. This paper presents several
empirical studies whose results contradict this perspective and thereby show its
limitations. A number of theoretical and managerial implications and some areas
ripe for future research are presented.
TABLE OF CONTENTS
ABSTRACT
2
1. INTRODUCTION
4
2. PROBLEM STATEMENT AND CONCEPTUAL MODEL
7
2.1 PROBLEM STATEMENT
7
2.2 CONCEPTUAL MODEL
9
3. METHODOLOGY
10
3.1 RESEARCH METHOD
10
3.2 RESTRICTIONS AND PREREQUISITES
11
4. LITERATURE REVIEW
12
4.1 MANAGEMENT CONTROL
12
4.2 TRUST
20
4.3 RISK
24
4.4 RELATIONSHIP BETWEEN CONTROL, TRUST AND RISK
26
5. ANALYSIS
33
5.1 WHAT IS CONTROL?
33
5.2 WHAT IS TRUST?
34
5.3 WHAT IS THE RELATIONSHIP BETWEEN CONTROL AND TRUST? 35
5.4 WHAT IS RISK?
37
5.5 IN WHAT WAY IS RISK CONNECTED TO TRUST AND CONTROL? 37
1. INTRODUCTION
In the past two decades, where globalisation of business activities increased, we have observed more and more companies collaborating with each other in order to get access to knowledge, new markets, financial resources or share risks together and to
strengthen their position worldwide. These inter-‐firms arrangements, also called strategic alliances, can range from equity-‐based joint venture relationships to
outsourcing relationships and joint R&D projects (Van der Meer-‐Kooistra & Vosselman, 2000). When a company forms an international joint venture, it can more easily gain access to new markets than by operating on their own. The joint venture can share their knowledge, networks and expertise of local markets. Furthermore, by collaborating with local companies, trade barriers can be bypassed and pressures from the government can be prevented.
When companies form strategic alliances, they become interdependent. This implies companies have to deal with different aims, types of knowledge and expertise. If they want to make their collaboration a success, the parties have to coordinate their contributions to the alliance and share their knowledge and expertise. Furthermore, they have to be prepared to pay attention to the interests of the other party and to aim for the goals of the strategic alliance instead of their own (Dekker, 2004). However, there is always the risk one of the partners behaves opportunistically and thereby harms the other party. Since strategic alliances are established for the long-‐term, the
circumstances may change over time and influence the collaboration. If these influences threaten the relationship, the parties have to react by changing the control of the strategic alliance. These characteristics of strategic alliances make the control of these relationships more complicated (Coletti, Sedatole, & Towry, 2005).
Appropriate governance structures, including management control systems and the development of trust, may work to reduce risk and decrease failure (Das & Teng, 2001). From a social science perspective, many authors take the view trust is viable and that it is an important element in reducing relational risk (Ouchi, 1979; Nooteboom, 1996; Das & Teng, 2001). As Knights, Faith, Vurdubakis, & Willmott (2001) note, ‘a long tradition of management thought conceptualizes trust and control as opposing
On the contrary conceptual contributions, in line with transaction cost economics thinking, claim legal regulations are an important precondition for trust. Even more, a recent research by Möllering (2005) views the trust-‐control relationship in a completely different way. In stead of viewing trust and control as a dualism and to look for various connections between two distinct concepts, Möllering proposes a duality perspective. This entails trust and control each assume the existence of the other, refer to each other and create each other, but remain irreducible to each other. This concept of duality will be further explained in this research. In line with this reasoning, Vosselman and van der Meer-‐Kooistra (2009) take the view control and trust are not just substituting or adding, but that they interact. The common goals are establishment and maintenance of positive behavioural expectations. In order to create a positive state of mind regarding future behaviour, control must be exercised and trust must be build. Accounting can serve both control practices and trust building. Their study provides many opportunities for more empirical evidence on the dynamics between control and trust and how accounting plays a role in that relationship.
Furthermore, a key aspect associated with trust and control is risk (Das & Teng, 2001) and it has been claimed combinations of control and trust building will contribute to reducing risk. However, this relationship has not been thoroughly investigated in previous studies and is still an area where considerable benefits could be realized by investigating the control-‐trust-‐risk relationship (Langfield-‐Smith & Smith, 2003).
When looking at the three streams of research in management control (Caglio & Ditillo, 2008), it can be concluded that the stream on control archetypes suggests the use of alternate models of control (more based on trust) (Langfield-‐Smith & Smith, 2003); the stream on control mechanisms proposes the use of formal behavioural and output control only mediated by trust (Dekker, 2004) and the stream on accounting and cost controls indicates the adoption of inter-‐organizational accounting techniques and considers trust as a contextual factor characterizing the relational environment (Cooper & Slagmulder, 2004). Thus, there is not an overall consensus and it can be concluded there is a fundamental disagreement in the literature on the relationship between trust, control and risk.
Does trust precede control or vice versa? Which is more effective in reducing risk in the collaboration? These questions lead to the following research question, which will be addressed in this research:
The aim of this article is to present the current conflict between the ‘complementary’ and ‘substitute’ views by using new insights from the control and trust relationship and by integrating risk in the alliance. These new insights will be of significant importance for managers and companies who are in the process of forming a joint venture. In order to successfully develop a joint venture, a thorough analysis of the partners’ wishes, capabilities and objectives is needed. Together with an analysis of the risk facing both partners, managers can get more insights on which elements can be important when designing an alliance and it might show when it is wise to use a control-‐based or trust-‐ based approach.
This paper contributes to the literature in several ways. First of all, it presents the trust and control relationship in different ways. In contrary to previous studies, this study does not only focus on whether control precedes trust of vice versa, but also looks at the possibilities that trust and control may be interrelated and that they interact. Second, this thesis will link risk to the relationship between trust and control. In a research area that is still developing, this can create new theoretical insights. Third, recommendations for practitioners will be from a management-‐centred perspective in order to have value for actual alliance formation.
This thesis will consist out of eight chapters.
Chapter 1 consists of the introduction to the subject and its practical and theoretical relevance. The problem statement and the methods used in this research are explained in chapter 2 and 3. At the end of chapter 2 the conceptual model will be presented. Chapter 4 will consist of the literature review. In this chapter the individual concepts are defined and the underlying relationships will be presented. The first section will cover the literature on (management) control, the second will cover the domain of trust and the final section will include literature on risk assessment and underlying relationships. Chapter 5 will analyse the relationships between the concepts of trust, control and risk and how these are visible in joint ventures. The conclusions of this research, answer to the problem statement and recommendations for practice will be presented in chapter 6. The final chapter will consist of the limitations of this research and it will provide areas for future research.
2. PROBLEM STATEMENT AND CONCEPTUAL MODEL
This section will provide a brief overview of the current literature on trust, control, risk and the relationship between these three concepts. By explaining how these concepts and their relationship are viewed in the current literature, the problem statement and sub questions will be explained. To conclude this section, the conceptual model will be presented.
2.1 PROBLEM STATEMENT
In this study, four different views on the role of control and trust can be distinguished. First, there is the transaction cost economics, which views the contract (and therefore control) as a means to limit the opportunities and incentives for opportunism. According to TCE, this enables parties to cooperate with each other, since they will be sanctioned for opportunistic behaviour. In the view of TCE, a contract (and therefore control) is a prerequisite for cooperation. Trust is not a part of this theory, since TCE believe a contract will provide enough guidelines and sanctions for partners to cooperate with each other.
The social scientists often view control in conflict with trust. They argue that control may be detrimental to trust, since forms of control (e.g. extensive contracts) can be interpreted as a sign of distrust (Lyons & Mehta, 1997). Therefore, active use of controls may evoke conflict, opportunism and defensive behaviour. Taking this side of the use of controls into consideration, it can be concluded it may not always be desirable to completely specify and enforce a contract (Fehr & Schmidt, 2002). Hence, in this view control and trust are negatively related; the use of controls reduces the level of trust and/or disables the development of trust.
The third interpretation of the relationship between trust and control states that trust is preceding and embedding relationships, and thereby decreasing the need for formal control and contracts (Caglio & Ditillo, 2008). In this view, trust precedes control, and therefore controls can become unnecessary.
The fourth view is the one presented by Möllering, who views the control-‐trust relationship as a duality instead of complementary or substitutional. He mentions that trust and control create each other.
this relationship, the results are contradicting the propositions of the theoretical papers, leading to a fragmented foundation of the relationship between trust, control and risk. Basically, the dominant view of trust and control is that of opposing alternatives whereby control leads to less trust and trust leads to a decreased necessity for control. However, the empirical evidence about the relationship between control and trust is mixed and many studies did not include the mitigation of risk in this relationship. The fundamental disagreement in the literature on the relationship between trust and control, and the question how these elements interact, remains.
The purpose of this paper is to help resolve the conflict between the ‘complementary’ and ‘substitute’ views by using new insights from the control and trust relationship and by integrating insights on the different aspects of risk. First of all, the concepts of trust, control and risk will be explained and when these concepts are clear, the relationship between them will be analysed by evaluating and integrating existing literature. To reach this goal, the following problem statement is defined:
‘How do control, trust and risk interact in strategic alliances?
By answering the following sub questions, this thesis can eventually provide an answer to the problem statement:
1. What is control?
2. What is trust?
By answering sub questions one and two, the two distinct concepts are defined and it will be easier to describe the relationship between them.
3. What is the relationship between control and trust?
4. What is risk?
By defining the different types of risk an alliance faces, it will be easier to connect it with the use of trust and control when forming an alliance.
2.2 CONCEPTUAL MODEL
In order to graphically represent the relationship between trust, control and risk, the following conceptual model is presented:
Figure 2: Conceptual model
As this model clarifies, the relationship between the three concepts is basically two-‐ sided. Every single concept has an influence on the other concepts and is influenced by the other concepts. This also shows the disagreement in the literature, since it’s not clear how and whether the concepts influence each other and if one concept precedes another. As this model shows, risk and trust are divided into subjects. Risk is divided into relational and performance risk and trust is divided into goodwill and competence trust. This division is based on previous literature (e.g. Das & Teng, 1996; Klein-‐
Wolthuis et al, 2005). The concepts of relational risk, performance risk, goodwill trust and competence trust will be explained thoroughly in the coming chapters.
3. METHODOLOGY
This part of the thesis will explain the research design of the study and methodology followed. The research method will be explained. The search strategy will be defined and the selection of articles will be clarified.
3.1 RESEARCH METHOD
This research can be identified as a pure scientific research (Leeuw, 2005). It can be defined as a literature study conducted by desk research. This research consists of two different parts, namely descriptive and explorative research (Leeuw, 2005). The first part, descriptive research, is conducted in order to collect all the information needed to answer the sub questions. After all concepts have been clearly defined, an analysis of the relationship between the concepts is defined. The second part of the research, the explorative research, is conducted to analyze the data generated by the descriptive research and thereby, answering the problem statement.
In order to gain access to all the relevant information necessary to conduct a good analysis, several articles on the studied concepts are used. These articles have been accessed through different means. The majority of these articles have been accessed through electronic journals and electronic databases. The journals which have been used to select these articles, are all scientific journals in which peers evaluated the articles on their scientific contribution before these articles could be published. Some examples of these journals are ‘Management Accounting Research’, ‘Accounting, Organizations & Society’ and ‘Organization Science’. The database through which various articles have been found was the full-‐tekst database ‘EBSCO Host’, the worlds largest database for scientific articles. In order to find the necessary articles, a number of keywords have been used to narrow the results from the search. The keywords are: ‘joint venture’, ‘trust’, ‘control’, ‘trust control relationship’, ‘risk assessment’, ‘risk’, ‘management control’, ‘strategic alliances’, ‘management’, ‘organizational structure’.
The most important inclusion criterion is the fact that the article must include the relationship between trust and control in strategic alliances. Articles that didn’t include this relationship were not used. Articles published before the year 2000 were also excluded due to possibility of obsolete and therefore irrelevant information. However, articles published before the year 2000 and referenced by other articles and which are still referred to in recent articles are considered articles with great theoretical basis and are therefore included in the research.
Another inclusion criterion is that the articles must be peer-‐reviewed. Peer-‐reviewed articles are critically examined by professional researchers and professors and are therefore considered of great quality.
3.2 RESTRICTIONS AND PREREQUISITES
Research methods and the results of the research are always subject to limitations. Restricitions and prerequisites indicate these limitations to which methods and results are liable (Leeuw, 2005). As de Leeuw (2005) mentions in his book, restrictions consist out of two kinds, namely process-‐limitations and prerequisites and product-‐limitations and prerequisites. The latter, product-‐limitations and prerequisites, are about the validity and reliability of the product (in this research, the product is the used literature). All of the articles used in this research are scientific articles and these articles are selected by various inclusion and exclusion criteria, which will result into greater reliability and validity. The journals from which the articles are selected are all highly acknowledged journals, in which the selection procedure to publish the articles is very strict.
4. LITERATURE REVIEW
In this chapter the theoretical concepts of this study are explained. The first section will explain the concept of management control and control systems. After that, the different types of trust will be explained in the next section. The final section will consist of the different types of risk a strategic alliance faces and it will connect the three concepts of trust, control and risk by discussing the relationships between these concepts. The goal of this chapter is to get a comprehensive understanding of all concepts and thereby provide a good basis for a thorough analysis of the underlying relationships.
It is in the last two decades that researchers began to consider the design of governance structures in situations that span traditional organisational boundaries, hereby
including strategic alliances and outsourcing. These alliances are usually characterized as partnerships or relationships and may involve the sharing of joint decision making in areas like strategic planning, new product and process development and also joint investments in relation-‐specific assets (Langfield-‐Smith & Smith, 2003).
A useful starting point in studying control in organisations and strategic alliances is to consider how control relationships in a single firm are realized.
4.1 MANAGEMENT CONTROL
According to Anthony (1965) management control is a process that managers use to make sure the goals of the organisation are effectively and efficiently pursued and to obtain the resources to achieve those goals. Agency theory is seen as the basis for management control. The message of the agency theory is that the goals of the
principals (shareholders and owners of the firm) can be misaligned with the goals of the agent (the manager). The problems the agency theory addresses are twofold. The first problem is when the goals of the agent and the principal are in conflict, and the principal is not able to verify what the agent is doing (due to lack of information or lack of
On the other hand, when there is complete information available about the activities of the agent, the management control can be based on the behaviour and actions of the agent. Merchant, van der Stede & Zheng (2003) discussed that organizations use management control systems to align the goals of the individuals with the goals of the organization. Through the use of several instruments (e.g. performance measurement) companies want to achieve goal congruence. Other reasons for using management control systems are: motivational problems, lack of direction and personal limitations (Merchant, van der Stede & Zheng 2003).
Controls have been categorised in many ways; formal versus informal controls, behaviour versus outcome controls, mechanistic versus organic controls and
bureaucratic versus clan controls. However, these categories are not distinct and many believe that each organization has a form of formal, explicitly designed controls and also a form of unwritten, social controls that cannot be designed directly. Merchant, van der Stede & Zheng (2003) distinguish four different kinds of management control types that are evident in basically every management control system. These four types are: action control, results control, personal control and cultural control. There are other
researchers who distinguish between outcome controls and behaviour controls within formally designed control systems (Ouchi, 1979; Eisenhardt, 1985; Anderson and Oliver, 1987). These authors mention that outcome controls measure and monitor the outputs of operations or behaviour. On the other hand, behaviour controls specify and monitor individuals behaviour. Results control as defined by Merchant, van der Stede & Zheng (2003) is similar to outcome control as defined by Ouchi (1979), Eisenhardt (1985) and Anderson and Oliver (1987). Action control is similar to behaviour control, since both base the control on the actions and behaviour of individuals. Ouchi (1979) also defined clan or social controls that are present in all organizations (in varying degrees). These controls cannot be designed explicitly, but can be shaped through interactions between people, codes of conduct, senior manager attitudes and style and rituals. Clan controls are therefore similar to personal and cultural controls as defined by Merchant, van der Stede & Zheng(2003).
more based on an individual’s behaviour and therefore has more relationship with the trust between partners.
Outcome based control systems are implemented to measure and monitor the outputs of operations or behaviour. These control systems rely on simple results measures, and make use of more variable compensation (Anderson and Oliver, 1987). This means employees are rewarded with a higher compensation, when they reach the targets that are set for them. Because employees are aware of the targets they have to achieve, this type of control is considered effective since employees know beforehand what is expected of them.
Behaviour based control systems are considered one of the most direct control systems (Merchant, van der Stede & Zheng 2003). The idea behind this is that
employees know what behaviour is desired of them and that their behaviour will be controlled, which leads to effective employees. In contrast with outcome based control systems, behaviour based control systems rely more on a fixed salary instead of more variable pay systems. Behaviour based control systems are believed to be effective, because management can clearly define the desired behaviour through mentioning which rules to follow and how to follow them. Therefore, employees know what behaviour is desired from them.
Another similar theory to the previously mentioned theory is that of the goal of
management control by Simons (1995). Simons defined four levers of control managers can use to influence their employees. Diagnostic control systems are implemented to ensure important goals are being achieved effectively. These control systems are implemented to build and support clear targets. Beliefs systems are used to
communicate the core values and principals and the mission of the organizations and to make sure the employees follow and act according to those beliefs. Boundary systems specify and enforce the rule of the game and act as the ‘brakes’ of the organization. They specify the risks that have to be avoided. Finally, the interactive control systems
encourage open dialogue between top management and the employees to enhance learning in all levels of the organization and to learn about the threats and opportunities and the environment changes (Simons, 1995).
Since employees are strictly controlled, tight control systems are believed to ensure that employees will act in the interest of the organization (Simons, 1995; Merchant, van der Stede & Zheng, 2003). If that is the case, every organization would choose for a tight control system. However, to choose between a tight and loose control system depends on the costs, benefits and possible negative side effects of a tight control system. When deciding between a loose or tight control systems, it is important for managers to have sufficient knowledge of the objects of control and how these objects are related to organizational objectives (Merchant, van der Stede & Zheng, 2003). Only when managers have this knowledge, tight control systems can be implemented. Otherwise, the negative side effects will become too great and they will have to choose for a looser control system. However, Kamminga (2003) argues that the distinction between tight and loose control systems is not always that straightforward. Tight control does not necessarily mean that a parent influences the day-‐to-‐day activities on a daily basis. For instance, the parent company can have strict rules on behaviour and keeps monitoring from a distance whether this behaviour is carried out. Therefore tight control does not need to be visible on the surface and it can be used in direct and indirect ways
(Kamminga, 2003).
To see how control is used in strategic alliances, in the following section several articles in this area are discussed to get a clear understanding of what control in joint ventures entails.
First of all, the definition of control in joint ventures is slightly different than that of management control, however the definitions are in line with each other. Geringer and Herbert (1991) define control in joint ventures as ‘the process by which partners’ firms influence a joint venture to behave in a manner that achieves partner objectives and satisfactory performance.’ They explain the notion of control based on three
dimensions: mechanisms of control, tightness of control and the focus of control. How control is, eventually, implemented in the joint venture relies on the relative bargaining power of the parents.
Fryxell, Dooley and Vryza (2002) also have performed a study in international joint ventures and especially into the interaction of trust and control. They mentioned that asset specificity raises the stakes of opportunism, whereas agency problems raise the doubts of ones’ representation in the alliance. Therefore, controlling the partner is one of the highest priorities in the alliance. Such control can be realized through the use of various control systems. Fryxell, Dooley and Vryza (2002) and Das and Teng (2001) use formal and social control to explain the control systems used. Formal control systems are based on post-‐hoc evaluations and therefore the management can evaluate the results with the expectations the management had beforehand. This type of control can be identified with results control and outcome based controls, since these controls also look at post-‐hoc evaluations and compare these to a priori expectations. Social controls, on the other hand, are mechanisms that can influence the behaviour of employees by imposing restrictions on their behaviour. This is very similar to cultural controls and behaviour controls. These social controls can be deducted from a companies mission and philosophy statements, but they usually exist in non-‐tangible shared
understandings and values. Inkpen and Currall (2004) further elaborate on formal and social controls in their research on trust, control and learning in joint ventures. They mention two ways in which these controls can be used in joint ventures. First of all, firms can use both controls to ‘hedge’ against the risk of the failure of one control. In other words, if the social controls fail, the formal controls that are set out in the
contractual agreement are still in effect. Furthermore, both types of control can be used simultaneously but on different levels of analysis. Formal controls can be in effect on the interfirm level, while social controls exist between the joint venture managers. So even though there is a good relationship between the joint venture managers and therefore the social controls are well utilised, firm level policies still may endorse contractual safeguards to be in place and therefore to make use of formal controls. Van der Meer-‐ Kooistra & Vosselman (2000) use insights from transaction cost economics and social theory to claim that there are several control patterns in interfirm relationships. They distinguish the following three patterns: a market based pattern, bureaucracy based pattern and a trust-‐based pattern. These patterns will be explained in more detail.
Market based patterns
Hakansson & Lind, 2004; Sartorius & Kirsten, 2005). This pattern can be used in cases of high to low levels of uncertainty, high task programmability and output measurability and low asset specificity (Spekle, 2001; Langfield-‐Smith & Smith, 2003; Van der Meer-‐ Kooistra & Vosselman, 2000).
Bureaucratic patterns
In the existing literature there is a consensus about the bureaucratic patterns of control. Contracts are detailed in order to monitor the performance and detailed rules and specific targets are used. The aim of these controls is to guarantee constant supervision and performance measurement (Van der Meer-‐Kooistra & Vosselman, 2000). To take advantage of these controls, companies need to be in constant dialogue and they need to exchange specific information concerning the outputs of their activities and the use of their resources. Bureaucratic patterns should be used in environments with medium uncertainty, high task programmability and output measurability and moderate asset specificity (Van der Meer-‐Kooistra & Vosselman, 2000; Sartorius & Kirsten, 2005; Langfield-‐Smith & Smith, 2003). Additionally, this pattern of control is suitable when partners have an asymmetry in bargaining power, medium risk-‐sharing preference and when institutional factors influence the contractual rules (Langfield-‐Smith & Smith, 2003).
Trust based patterns
In these patterns, trust is the dominant control mechanism. Partners are selected on basis of friendship or from a reputation of trustworthiness. Contracts are not detailed and are mainly used as frameworks, which will be worked out in more detail as time goes by (Van der Meer-‐Kooistra & Vosselman, 2000). According to Van der Meer-‐ Kooistra & Vosselman (2000) trust based patterns of control are suitable in unstable environments, highly uncertain transactions and where a risk-‐sharing is present. In contrast to the previous two patterns, there is not an overall consensus over the third pattern of control. This will be elaborated more in the following chapter on trust.
Furthermore, Sartorius & Kirsten (2005) argue that market based patterns should be used in contexts with low repetition. In addition, Caglio & Ditillo (2008) argue that the literature on control archetypes has been constricted by a static view of the link between the control and transactions: ‘Once the nature of the relationship changes, control changes in a direct one-‐to-‐one relationship’ (Caglio & Ditillo, 2008, p.874). One of the main consequences of this view is that literature only focused on the simple control archetypes and neglected the more complex archetypes as observed in practice. This consequence can be an explanation of the difference found between the theoretical expectations of Spekle (2001) and the empirical evidence collected by Van der Meer-‐ Kooistra & Vosselman (2000) in the case of asset specificity.
Kamminga (2003) has studied management control in joint ventures and he has
conducted five case studies to research this topic. He bases his theoretical framework on Ouchi’s model of control and Williamsons’ transaction cost theory. Thereby, he has formulated three patterns of joint venture control – content-‐based, context-‐based and consultation-‐based. In content-‐based patterns parents focus tight control on outputs and behaviour (focus on the ‘content’). Outputs are highly measurable and the environment of the joint venture is stable and uncertainty is low. Context-‐based patterns, on the other hand, will be found more in unstable environments where uncertainty is high. Activities are hard to measure and therefore difficult to prescribe. Instead of focusing their control on the activities, the parents will focus on creating trust and a good atmosphere between the partners. Consultation-‐based control patterns will occur more often in situations where both partners bring in complementary assets, so there will be differences in the contributions and knowledge of the partners. Therefore in these situations both context-‐ as content-‐based control patterns are needed in order to have a successful alliance (Kamminga, 2003).
However, the use of formal controls may limit the development of trust, if one partner interprets the trustworthiness of the other partner as a result of the formal controls that are in place.
The following table presents an overview of the studies discussed in this chapter, their main results and the theoretical base those studies used for their research.
Table 1: Overview of the studies on management control
Previous study
Results
Theoretical base
Eisenhardt (1989)
-‐ No information on
activities of agent -‐>
management control
based on results of the
agent.
-‐ Complete information
on activities of agent -‐>
management control
based on behaviour of
agent.
Agency theory
Simons (1995)
Four levers of
management control
‘Goal of management
control’ theory
Geringer and Herbert
(1991)
Control defined by three
dimensions:
1) Mechanisms of control
2) Tightness of control
3) Focus of control
Joint venture control
Inkpen and Currall
(2004)
Formal and social
controls. Both types of
controls can be used
simultaneously
Coevolutionary process
to trust and control
Van der Meer-‐Kooistra
and Vosselman (2000)
Three control patterns:
1) Market based pattern
2) Bureaucracy based
pattern
3) Trust based pattern
Transaction cost theory
and social theory
Kamminga (2003)
Three patterns of joint
venture control:
1) Content based pattern
2) Context based pattern
3) Consultation based
pattern
Ouchi’s model of control
and transaction cost
theory.
4.2 TRUST
Trust is a phenomenon that is studied thoroughly throughout the years in various disciplines. Trust is a difficult concept to study since it has been classified and defined in many ways. What lies beneath the trust approach, is the idea that when partners are intrinsically motivated to behave in a way which is beneficial to the alliance, less formal control mechanisms are needed, as partners are less likely to behave opportunistically. Most definitions of trust focus on exposing oneself to vulnerability (Langfield-‐Smith & Smith, 2003). It has been argued that trust is particularly relevant for inter-‐firm relationships, as trust is only important in situations where there is risk (Langfield-‐ Smith & Smith, 2003), and risk management is a critical aspect of these relationships (Das & Teng, 2001). Because trust exists on a personal, organizational and even international level, it makes it difficult to study and to agree on one definition. Some older studies like Barber (1983) and Gabarro (1978) began to discuss the importance of competence in trust. It stresses the importance of the ability and expertise of the
partner. Other studies like that of Ring & Van de Ven (1992) and Rempel et al (1985) began to stress the importance of the intentions of the partner. They talked about the moral obligations and responsibility the partner has to not only pursue their own concerns and goals, but also to act in the favour of the alliance. Based on these two distinctions, Nooteboom (1996) distinguishes between the ability of a partner to perform according agreements (competence trust), or his intentions to do so (goodwill trust). The notions of competence trust and goodwill trust are adopted in many other articles (Groot & Merchant, 2000; Das & Teng, 2001, Nooteboom, 2010; Das & Teng, 2004) since they provide a clear distinction. Many definitions of trust incorporate the element of risk, since risk plays an important role in understanding trust. This thesis will focus on this relationship in the next chapters. In addition to goodwill trust and competence trust, Langfield-‐Smith & Smith (2003) add another notion of trust, namely contractual trust. Contractual trust rests on the assumption that the partner will respect the agreement and stick to it, whether it is in writing or not (Van der Meer-‐Kooistra & Vosselman, 2000).
antecedents) and as the actions resulting from subjective trust (behavioural trust) (Das & Teng, 2004).
They base these concepts on previous studies and grouped those outcomes into the three underlying constructs. Some scholars have viewed different types of trust mainly as a development processes and sources and foundations (Curral & Judge, 1995; Barney & Hansen, 1996; Sheppard & Tuchinsky, 1996). According to Das & Teng (2004) this can be classified as trust antecedents. In addition, other scholars define the dimensions of trust based on goodwill, competence and responsibility (Gabarro, 1978; McAllister, 1995). This can be viewed as the category of subjective trust. Das & Teng (2004) further divide the category of subjective trust into goodwill trust and competence trust, in line with previous articles. Behavioural trust is about the trust one has in the partner and allowing them to perform certain tasks, giving them resources, discussing valuable information and so on. In other words, to trust another is to rely on the actions of the partner over which you have no control. Based on this conceptualization, it can be concluded that trust is necessary, when there is no control available. Das & Teng (2004) therefore see trust as a substitute for control. Furthermore, behavioural trust is about being voluntarily vulnerable to the actions of the partner.
Groot and Merchant (2000) propose, in their study on control in join ventures, that when trust between partners is relatively low, the controls over the joint venture will be relatively tight and the control focus will be broad. Their findings based on three case studies provide mixed results. One case study supports the proposition, while the other two are only half-‐consistent with the proposition. Therefore, Groot and Merchant (2000) conclude that, while trust is probably an important variable in explaining the variance in partners control tightness and breadth of focus, it is not a dominant factor.
Opportunistic behaviour can have a weak and a strong form (Maguire, Philips, & Hardy, 2001). The weak/passive form is the lack of dedication in performing to the best of ones competences. The strong/active form entails lying, cheating and stealing to expropriate advantages from the partner. The absence of the strong/active form of opportunism is called ‘goodwill’. Thus, the goodwill trust has two dimensions; trust in dedication and trust in goodwill (Klein-‐Wolthuis et al., 2005).
Based on the distinction between strong and weak forms of trust, control can also be designed accordingly, when following Klein-‐Wolthuis, Nooteboom & Hillebrand (2005). Relational risk can therefore be mitigated in three ways: opportunity control, incentive control and benevolence (goodwill). These three ways of mitigating risk may be based on macro/universalistic and micro/particularistic sources (Bachmann, 2001; (Nooteboom, 2002) as shown in Table 2.
Table 2: Limitation of opportunism
Macro sources are general and impersonal and they arise from the institutional
environment of laws, norms and values. The micro sources arise of specific relations, are personalized and are referred to as sources of ‘thick’ trust (Nooteboom, 2002).
Nooteboom (2002) distinguish between ‘thin’ and ‘thick’ trust. Van der Meer-‐Kooistra & Vosselman (2009) borrowed these concepts and explained thin trust as ‘trust that only rests upon compensation for negative behavioural expectations, without producing positive behavioural expectations.’ Thick trust, however, creates positive expectations about the actions and behaviour of the other party. Van der Meer-‐Kooistra & Vosselman (2009) explain that thin trust is necessary, but it is not sufficient for the continuation of a partnership.
As Table 2 indicates, there are three ways of mitigating relational risk.
range of a partner’s actions. This type of control refers to an ‘outside’ form, which refers to control of external partners by contract, and an ‘inside form’ which refers to the exercise of hierarchy (Inkpen & Currall, 2004). Both forms entail monitoring of behaviour to detect cheating and impose sanctions as a manner of enforcement. Incentive control refers to the situation that partner A behaves well to partner B, because A is dependent on B, because A faces switching costs, or B holds a hostage from A.
The third way of mitigating relational risk, benevolence, refers to the limitation of inclination towards opportunistic behaviours based on established social norms and values and empathy, identification and routines developed in specific relations.
Empathy entails that one knows and understands how partners think. It allows one to assess the strengths and weaknesses in competence and intentions, and thereby
determine the limits of trustworthiness. Identification goes even further by establishing that people think and feel in the same way, sharing views of the world and norms of behaviour. This can lead to friendship-‐based trust (Nooteboom, 2002). It can even go so far that one partner is not able or willing to consider the possibility of
untrustworthiness.
The following table presents an overview of the studies used to explain the concept of trust.
Table 3: Overview of the studies on trust.
Previous study Results
Barber (1983) The importance of competence in trust.
Ring and van de Ven (1992) The importance of the intentions of the partner.
Nooteboom (1996) Divided trust into two components:
1) Competence trust 2) Goodwill trust
Langfield –Smith & Smith (2003) Discussed one additional type of trust: Contractual trust
Das & Teng (2004) Divided trust into three different constructs:
1) Subjective trust 2) Trust antecedents 3) Behavioural trust
Groot and Merchant (2000) Trust is an important variable in explaining the variance in partners control tightness and breadth of focus, but it is not a dominant factor. Klein-‐Wolthuis et al., (2005) Relation risk can be mitigated in three ways:
1) Opportunity control 2) Incentive control 3) Benevolence (goodwill)
Nooteboom (2002) Distinction between thin and thick trust.
