Managing and controlling outside the firm’s boundaries: the interdependence of digital platforms

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Managing and controlling outside the

firm’s boundaries: the interdependence of

digital platforms

24 June 2019

Master thesis by Sjaak Harmen Noor

(S 3452638)

MSc Business Administration - Organizational and Management Control University of Groningen, Faculty of Economics and Business

Thesis under the supervision of dr. A. Bellisario Co-supervisor: prof. dr. I.J.J. Burgers

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ABSTRACT

Globalization and digitalization have pathed the way for worldwide business relationships, and an economy based on information technology, with digital platforms leading the way. The interdependence of organizations creates a necessity for good relations and collaboration, and a subsequent need for control over these interfirm relationships, outside the boundaries of the firm. This study aimed to illuminate the way digital platforms manage and control their interfirm relationships, by studying two successful digital platforms. The findings show that digital platforms have different ways of leveraging their bargaining power, which subsequently affect the controls that are deployed. Establishing relationships appears to be primarily strategically motivated by exploitation, however, once the relationship is established the strategy regarding the leveraging of knowledge influences the interaction more strongly. One company keeps its knowledge primarily in-house, for creating products itself, whilst the other company depicts openness in their knowledge, sharing it with its suppliers to foster joint growth. Here, the second company risks losing its bargaining power through a knowledge spillover, for which it accounts through trust and freedom. Trust and freedom are also present in the company that keeps its knowledge in-house, yet puts less emphasis on these and more on formal controls. Hence, trust and freedom in relations appear to be key in controlling and managing digital platform’s interfirm relations. Furthermore, the openness in sharing knowledge seems to dependend on the market orientation and strategy, and subsequent motivation for maintaining the interfirm relationships.

Keywords: interfirm relationships; digital platforms; knowledge sharing; platform

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1 INTRODUCTION

Digitalization has led the way for globalization, creating opportunities for companies all over the world, with digital platforms at the forefront: “Platforms and the cloud […]

reconfigure globalization itself” (Kenney & Zysman, 2016). These opportunities for businesses

to connect all around the world create interfirm relationships, which create value through either synergies and competitive advantages, or both (Coletti, Sedatole, & Towry, 2005). These interfirm relationships make that the scope of management control expands from an intrafirm perspective to outside the borders of the organization (Otley, 1994), as these become more important. Research has moved accordingly, for instance resulting in studies that regard partner selection (Das & Teng, 1998, 2001; Ding, Dekker, & Groot, 2013), and regarding general controls and mechanisms that are used in interfirm relationships (Dekker, 2004). However, little attention is given to how the intrafirm and interfirm management accounting and controls affect or relate to one other (Dekker, 2016), despite the growing intertwining of businesses.

The increasing amount of interrelatedness in business relationships tends to create difficulties for management control as other organizations lie outside the direct sphere of influence of the focal organization. However, if firms overcome these difficulties, Lorenzoni and Lipparini (1999) found that firms who can integrate knowledge outside the boundaries of the firm with knowledge inside the firm, can accelerate growth and innovativeness. Benefits from interfirm relationships do not always come to fruition, opportunistic behaviour within the relationship can be detrimental to the benefits. Hamel (1991) describes partnerships as a race to learn, in which the quickest learner dominates the relationship: ‘if they [the partner] learn

what we know, before we learn what they know, we become redundant’. Absence of

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5 This research aims to provide insights in how interfirm relationships affect organizations, and how these organizations interact with each other, by means of exploratory research. To uncover these insights, digital platforms are studied as these platforms have been given birth to due to the greater interrelatedness by globalization and digitalization. These digital platforms depend heavily on other organizations due to their nature of connection two sides of a market. By its nature, a platform provides a connection in two or multisided markets, among firm and/or individuals who may not have been able to interact otherwise (McIntyre & Srinivasan, 2017), highlighting the interdependence of digital platforms. Furthermore, digital platforms have multiple ways of creating value in their in their business model. Brousseau and Penard (2009) describe three aspects that a digital platform can get rewarded for: matching (transaction costs, network externalities), assembling (differentiation, economies of scale), and knowledge management (diffusion, access, quality). Subsequently, digital platforms can have different strategies and motivations regarding each of these three aspects, questioning the applicability of standard control patterns (Van der Meer-Kooistra & Vosselman, 2000), and aforementioned effects of motivation (Stouthuysen et al., 2017) as digital platforms can have multiple motivations for engaging in interfirm relations. In order to illuminate how these contemporary firms go about managing and controlling their interfirm relations, the following research question will be examined in this study:

Research question: How do digital platforms manage and control interfirm relationships?

Digital platforms can vary greatly, for example, Google offers a search platform, and Amazon and Bol.com are digital platforms that offer ecommerce and a marketplace. Despite the great variability in platforms, two similar, successful digital platforms are researched which exploit the biggest webstores in the Netherlands in their own respective niches, in order to draw comparison between these. A focus is put on the supplier side of the researched organizations, as their buyer side is primarily focussed on consumers, from which they can extract and produce knowledge, and monetize subsequently (Brousseau & Penard, 2009).

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6 platform. Especially given the variety and simultaneous deployment of value creation strategies by these digital platforms, which might disturb or problematize the required balance between accounting for control and accounting for trust that Vosselman and van der Meer-Kooistra (2009) propose for stable and durable relationships. This research aims further the understanding of managing and controlling interfirm relations by bringing in the perspective of contemporary, highly digitalized firms, an increase understanding of how digital platforms should be designed (De Reuver, Sørensen, & Basole, 2018).

In terms of practical contributions, this research answers a call by Malmi and Granlund (2009) by providing answers on questions of what management accounting systems or techniques to use, how to use these, and in what circumstances these should be applied. In this regard the research contributes by facilitating ideas on what formal and informal controls can be deployed, and their efficacy. Further, the context of a digital platform business model can provide differentiating factors in establishing and the interaction in relationships. Hence, organizations might learn what factors they should emphasize or improve upon to foster growth and innovation, or to enhance their control, past organizational boundaries.

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2 THEORETICAL BACKGROUND

The theoretical background into three parts. The first paragraph concerns the organization of interfirm relations, considering how and why these relations are formed, and what considerations there are to take into account. The following paragraph entails the control of and over relationships: why this is desirable, and what controls are used, both ex-ante and ex-post engagement. In the final paragraph the specificities regarding digital platforms are looked at, discerning what digital platforms are, how they deploy controls, and how they generate value.

2.1 ORGANIZATION OF INTERFIRM RELATIONS

Interfirm relationships can be described as alliances or cooperation between two or more firms, creating value through synergies and competitive advantages (Coletti et al., 2005). The formation of such a relationship is driven by three factors and are essential for a successful collaboration according to Chung, Singh and Lee (2000). These factors are: (1) resource complementarity, the extent to which the resources of either firm complement each other and thereby are more likely lead to benefits; (2) status similarity, when statuses are more similar, firms find more ease in interacting; and (3) social capital, the amount of social capital gained from prior alliance experience. Furthermore, the factor of resource complementarity is greatly important when these are hard to access through market mechanisms (Wu & Cavusgil, 2006) due to exclusivity of these. Also, an extended period of time is required in order to gain synergies and subsequent value from the resource complementarity, therefore the engaged firms need organizational commitment when entering the collaboration (Gautam Ahuja, 2000; Wu & Cavusgil, 2006). Das and Teng (2000) show that both resource complementarity and resource heterogeneity are key items for a firm’s choice of alliance structure, as these provide an indication of the potential synergies and value creation. However, as resource complementarity and resource heterogeneity are factors in partner selection, they provide no indication on how the relationship evolves, how the partners interact, and how these partners control each other.

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8 partners to lose their knowledge-based resources through the alliance (Mowery, Oxley, & Silverman, 1996). Nonequity alliances are regarded as all other forms of alliances and cooperative arrangements that do not involve equity exchange (Das & Teng, 2000), and are generally contract-based structures like agreements and supplier partnerships. Das and Teng (2000) use insights from Mowery et al. (1996) to distinguish unilateral contract-based and bilateral contract-based alliances, both commonalities in businesses. A key feature of unilateral contracts-based alliances is that the individual firms can carry out its obligations independently of the other. These contracts tend to be complete and specific, resulting in relatively low coordination or collaboration. Hence, this results in to fewer opportunities for (unwanted) interfirm knowledge transfer (Mowery et al., 1996). Opposite to unilateral, bilateral contract-based alliances are characterized by higher coordination and collaboration, requiring partners to continuously work together (Das & Teng, 2000), for example in joint developments, technology-sharing agreements, enhanced supplier partnerships and cross-licensing. Hence, various efforts are made in order to structure alliances in a way to safeguard unique capabilities, for instance through equity exchange and stipulations in contracts, however, these do not stipulate the interaction between the involved firms, nor the effectiveness of the relationship.

One form of interaction in interfirm relationships is collaborative communication, in which the involved organizations have cooperative attitudes and processes towards guiding the relationship, for example by highlighting shared interests and working towards these. Mohr et al. (1996) found that the effect of such collaborative communication differs per degree of integration and control between the organizations. One explanation for this difference is the (dis)conformity of expectations between the firms, which is an important factor in firms which have a relational focus. Greater integration and closer control lead to more precise expectations, resulting in higher conformity with these. Similarly, Johnson (1999) states that trust, fairness and absence of opportunism are dominant factors in creating high-quality, high performing relationships, which partly refer to the (dis)conformity of expectations in a relationship.

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9 partner, the instability of the venture increases, resulting in a shift in the balance of bargaining power between partners.

Hence, organizations seek alliances and partnership structures based on resource complementarities and resource heterogeneity, yet they behave cautiously when entering a relationship in order to retain control over their own resources and capabilities. Firms aim to structure alliances in ways to mitigate risk yet gain optimal synergies, resulting in less or more integration and control in the relationship, and potentially in non-beneficial opportunistic behaviour. Hence, a balance needs to be struck between cooperation and leveraging the relationship, through the relationship’s structure and their interaction.

2.2 CONTROL OF INTER-FIRM RELATIONSHIPS

Johnson (1999) found that trust, fairness and absence of opportunism are of great importance for high performing relationships, yet these items tend to be uncertain when engaging in new relationships. Uncertainties pose risks for organizations, in order to mitigate these risks, they undertake various efforts, taking both formal and informal approaches towards engaging in new relationships. The use of formal contracts and partner selection criteria are examples of such formal and informal risk mitigating activities (Ding et al., 2013). Through formal contracts, a company accounts for control as it aligns the long-term interest of the involved parties with the contract. Partner selection entails the accounting for trust building in the interfirm relationships by assessing three types of trust: (1) contractual trust, the expected adherence of partners to agreements and promises; (2) competence trust, the expectation of partners in the ability to fulfil their role; and (3) goodwill trust, the expectation of the partner’s intent to fulfil their role (Das & Teng, 1998, 2001; Sako, 1992). Lui and Ngo (2004) found that these types of trust and the level thereof affect formal contractual safeguards and the outcomes of the cooperation. Accordingly, a balance and interaction between accounting for control and accounting for trust building is a prerequisite for stable, durable interfirm transactional relationships (Vosselman & van der Meer-Kooistra, 2009). This implies that this balance and interaction shape the relationship between firms.

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10 put in place in order to direct employee behaviour’. Hence, through management controls, the managers’ and the employee’s interests are aligned with that of the firm. Therefore, when a firm strives for durable relationships, a balance should be struck between accounting for control and accounting for trust within a firm’s management control system (MCS), when also considering the prior mentioned, prescribed balance by Vosselman and van der Meer-Kooistra (2009).

From an analysis of 1980 through 2014, Otley (2016) concluded that elements of MCS tend to be loosely-coupled and the full coordination is precluded due to a rapid pace in development, faster than the coordination process is able to develop. In times of globalization and, subsequent, intensifying competition, firms continuously seek alliances to create a sustained competitive advantage, creating difficulties in coordination of controls. Firms deploy formal (outcome and behaviour controls), and informal (social) controls in their efforts to control their relationships (Dekker, 2004). One example is the use of open book accounting in relationships, an ex-post outcome control mechanism (Dekker, 2004). However, the effectiveness of this mechanism is up for debate as Windolph and Moeller (2012) document a negative effect on the cooperation within the relationship. Moreover, the effectiveness of controls in general vary across different settings (Baiman & Rajan, 2002), which might be due to key properties of measurement: objectivity, accuracy, and precision. These key properties can in some settings be defined more easily, for instance in formal, outcome controls, which tend to be the main focus of MCS. Vice versa, the defining of key properties can be more problematic in social areas, for which informal controls are more suited.

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11 For instance, in supply chains, alliances are a commonality and are generally strategically motivated by exploitation, implying that there would be a greater focus on outcome controls. In these supply chains, the principle of matching has been researched (Reusen & Stouthuysen, 2017), where firms in the same supply chain match their MCS in order to lower transaction risks, and by doing so increasing the ease of controlling outcomes. However, the organization control structure and context may cause misalignment. Reusen and Stouthuysen (2017) found that imitation of MCS in the supply chain are a source of misalignment in the supply chain, implying that mimicking a MCS is not a solution for control. Similarly, the degree of integration and control is found to affect interfirm relationships, through a reducing the effectiveness of communication in these relationships (Mohr et al., 1996).

Ergo, the context in which firms operate is of great importance for control structures. These contexts change rapidly due to rapid changes in technologies and competition for competitive advantages (Otley, 2016), making that a fit of the MCS with contingencies is important to retain a degree of coordination. Pernot and Roodhoft (2014) demonstrate that a contingency misfit of MCS is associated with poor performance, temporally, as when the MCS adapts to the new environment, performance is regained. In this case study was found that informal controls are more important than formal control as these formal controls were unable to overcome operational difficulties, lacking coordination. The adaptability of formal controls, such as outcome and behaviour controls, appears to be lacking, despite that these tend to be specifically designed to accommodate inter-organizational relationships (Pernot & Roodhooft, 2014), a similar conclusion to Otley (2016) that full coordination is precluded in elements of MCS. However, informal controls are better able to fit and adapt in new contexts (Pernot & Roodhooft, 2014), informal controls tend to not be specifically designed, but originate from norms and values, and subsequently can be more difficult to define. Of these informal controls, also social mechanisms, trust is the principal mode according to Dekker (2004).

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2.3 DIGITAL PLATFORMS’ CONTROL AND SPECIFICITIES

Digitalization has led to globalization and thereby allows organizations to find and establish relationships globally. This resulted in great changes in distribution structures, by breaking away from traditional reselling (Zhang, Cao, & He, 2019), and by allowing manufacturers to directly access its consumers through platforms like Amazon and Bol.com. Such platforms can be regarded as market intermediaries, a linkage between a two- or multi-sided market (Armstrong, 2006; Rochet & Tirole, 2006). In this, the platform is a place where buyer(s) and seller(s) interact with each other, digitally mediated by a third party, the digital platform (Kornberger, Pflueger, & Mouritsen, 2017). In being this mediating party, the digital platform generates value with its structure or business model, through economics of matching and intermediation: lowering search costs; through economics of assembling: bundling services or goods and delivering a package; or through economics of knowledge management: the ability to extract and produce knowledge from its users (Brousseau & Penard, 2009). Brousseau and Penard (2009) state that a digital platform uses a combination of these three aspects to generate value. In every business model a buyer and a seller are involved, for which the platform is the intermediary. Subsequently, the users place trust in the intermediary to, therefore much emphasis is being put on the platform’s ability to ensure stability between the buyers and sellers of the platform, highlighting the importance of controlling risks that might arise. According to Bradach and Eccles (1989) there are 2 mechanisms to stabilize a relationship with a partner, formal and informal mechanisms, respectively through written contracts or through trust.

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13 marketplace or as a reseller, which for it takes is dependent of the data and knowledge that the intermediary possesses and processes. In either form, the platform has a connection with the supplier, which calls for agreements between the supplier and the platform. Occasionally, digital platforms take both forms, like Bol.com and Amazon, they resell items from their own warehouses but also allow companies (and individuals) to sell items directly to customers through the platform.

In carrying out its business model, platforms can deploy leveraging mechanisms, by using one of its income sources to subsidize the other, as a digital platform can have multiple income sources (Brousseau & Penard, 2009) through its business model. For example, sellers on the platform could be charged for selling, this revenue can then be used to lower the price for buying the good or service. Traditional platforms have long used leverage in their business model, subsidizing one side of the platform with the benefits that are gained from the other, a commonality in two-sided markets (Argentesi & Filistrucchi, 2007; Eisenmann, Parker, & Van Alstyne, 2006). In their functioning, digital platforms can be regarded as the link in two-sided markets which benefits from the externalities that arise from providing this linkage, an example of the economics of matching (Brousseau & Penard, 2009). Thomas et al. (2014) theorize that digital platforms drive these concepts by making use of transaction leverage, which is based on the manipulation of market pricing mechanisms and market access, being an example of the knowledge management dimension of Brousseau and Penard (2009). For instance, by subsidizing market prices, lowering the price for consumers that buy from the platform, or by improving market access through increasing marketing efforts of the digital platform.

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3 METHODOLOGY

The research methods will be explained in this chapter. This entails the explanation for the qualitative approach, followed by the data, how this data is gathered and analysed. Lastly, the case selection is presented, as well as descriptions of the case companies in this research.

3.1 QUALITATIVE RESEARCH

The research question, ‘how do digital platforms manage and control interfirm

relationships?’, should form the starting point of the chosen research approach (Saunders,

Lewis, & Thornhill, 2016). Clarifying or exploring themes or issues are central to qualitative research, which primarily uses qualitatively natured data. Further, qualitative research aims to interpret and describe phenomena that occur in specific contexts (Saunders et al., 2016). Hence, this qualitative research is aimed at improving theory and practice by griping an understanding of the business phenomenon, which is appropriate for theory building (Dean Jr. & Bowen, 1994).

For answering the research question, a multi-method qualitative study is conducted on multiple cases. A case study is the preferred method to answer questions of ‘how’ and ‘why’, when the researcher has little control over behavioural events, and when the study’s focus is on a contemporary phenomenon, according to Yin (2014). The essence of a case study is to gain a thorough understanding of a decision or a set of decisions: why they are taken, how they were implemented, and with what result (Saunders et al., 2016). This research aims to illuminate the decisions made by organizations on the managing and controlling of interfirm relationships, in order to gain new insights and avenues for further research (Blumberg, Cooper, & Schindler, 2014). Two case companies have been studied in order to draw similarities between them, facilitating the generalizability, and for eliminating and controlling organizational specificities that might have affected the findings of this research.

In conducting the multiple-case study, various data sources have been used (i.e. data triangulation), enhancing the credibility and validity of the research (Eisenhardt, 1989; Mathison, 1988). In this respect, interviews, observations, archival records, documentation and physical artefacts are generally used in qualitative research approaches (Eisenhardt, 1989; Yin, 2014). Hence, semi-structured interviews have been conducted, documents were collected, and observations were made where possible during the research.

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16 for the data collection by making use of three qualitative data sources, being semi-structured in-depth interviews, documents and observations, in order to verify the data of all. The data and cases were analysed by using a type of pattern matching, explanation building.

3.1.2 Semi-structured interviews. Interviews are found to be a common method for

gathering qualitative data by research, and is one of the most important data sources for case studies (Denzin & Lincoln, 2018; Eisenhardt, 1989; Yin, 2014). In interviews, reflexivity might occur, where the interviewee’s responses and interviewer’s questions are influenced by a specific perspective (Yin, 2014), in order reduce the likeliness of reflexivity, the interviews have been semi-structured. Hence, a fixed set of main questions were set up in order to cover the main topics, the general structure (Drever, 1995). Also, a semi-structured approach is better suited for exploratory, explanatory, and evaluative purposes due to its more open nature (Saunders et al., 2016). The interviews have been conducted on employees in different levels within the case organizations. Higher level management has been interviewed in order to gain insight in why a specific course of action is taken, and how, for building the strategic context. Lower level employees have been interviewed in order to find effects and actions on and during the day-to-day activities. The overview of the interviews can be found in table 1, with corresponding codes which are referred to in the results. The general structure of the semi-structured interviews is provided in appendix 1 and 2 for higher level and lower level employees, respectively, and is derived from the framework for analysing performance management systems by Ferreira and Otley (2009). In addition, all interviewees have signed an informed consent form in order to substantiate the confidentiality and validity of the interviews.

Table 1: Interview overview

Code Position Duration Reason for selection

A 1 CEO 39 min. Providing an organization-wide overview A 2 Head of purchasing 61 min. Involved in management team and

responsible for supplier relationships A 3 Operational manager 56 min. Handles new (product) projects, intense

communication with suppliers

A 4 Controller 43 min. Provides an organization-wide overview from a control perspective

B 1 CEO 43 min. Providing a organization-wide overview B 2 Senior purchaser 51 min. Involved in the organization’s supplier

relationships

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3.1.3 Documents and observations. Documents, are purposely created written texts

by individuals or groups for specific situations (Mogalakwe, 2006). These may contain assumptions and have a style that is befitting for the situation or context in which it is used, and are generally supplementary to other data collection methods like interviews and observations (Mogalakwe, 2006). Also, the use of documents and observations as secondary data sources strengthens the research (Eisenhardt, 1989; Mathison, 1988). The nature of documents, in that they are recorded without the intervention of a researcher (Bowen, 2009), create this strengthening of the evidence and the research. The documents that are used in this research are outputs of (performance management) systems. Observations are made during examination and walkthroughs of the offices of both case companies.

3.1.4 Analysis. After the finalization of the data collection, the data has been analysed.

Interview data was analysed by using first- and thereafter second cycle coding, following guidelines of Saldaña (2013). The In Vivo coding method was applied for first cycle coding as this allows for framing of words that are used by interviewees in practices, rather than applying academic terms (Stringer, 2013), maintaining the context and framing of the wording. Thereafter, the first cycle codes are eclectically coded to generate themes which guided the second cycle coding process (Onwuegbuzie, Frels, & Hwang, 2016). The second-cycle coding is done using pattern coding, creating meta-codes by combining codes into smaller sets or constructs in order to identify emergent explanations (Miles & Huberman, 1994). In this coding process, the overarching technique of explanation building is deployed, in which the goal is to find an explanation for occurrences (Yin, 2014). Through iterative explanation building, plausible explanations were created, revised, and matched against both cases, coming to similarities and differences between the case companies. Throughout all interviews and coding cycles, documents and observations were used for confirming interviewee responses, or to enrich responses of interviewees, by supplying additional, contextual information.

3.2 CASE SELECTION

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18 use of a digital platform business model, eliminating traditional, offline platforms. Furthermore, the base of the selected case companies, and original business focus should be in and on the Netherlands, as it has one of the highest digitalization indexes in the world (Billon, Lera-Lopez, & Marco, 2010). This digitalization implies that digitalization efforts are widespread and are broadly accepted throughout the population, making for potentially stronger effects of digital efforts. Lastly, two cases are chosen for the research in order to allow for pairwise comparisons, enhancing generalizability and to find specificities. This emphasizes a preference for similar companies. Hence, the two companies that showed the greatest resemblance with the prior criteria were ultimately selected for this research.

3.2.1 Case company A. Company A is located in the Dutch province of Groningen,

established in 2007. From inception, the company has shown extreme growth, growing 295% over the past four years, making it one of the fastest growing technology companies in the Netherlands (Deloitte, 2018). The company exploits various ecommerce shops that are all differently themed, selling adult, erotic products all over the world, business to consumer (B2C) and Business to business (B2B). Further, the company offers wholesale solutions for other businesses, like APIs that allow fully automated order processing, and drop shipping. This can be regarded as a fulfilment platform that can be applied to other companies. In addition, the company has an affiliate program with extensive service, going as far as helping with setting up other online shops. However, the main focus is on their own ecommerce shops. The company sells over 14.000 products, among which are products that are designed and created by themselves. The various strategic avenues that the company pursues makes that there are various, dissimilar suppliers.

3.2.2 Case company B. Company B is situated in the eastern part of the Dutch

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4 FINDINGS

The results following from the interviews will be discussed in the chapter, by making use of the theory in chapter 2. The first paragraph will show the strategic context of both cases, the organization of their relationships, and show a comparison. The second paragraph shows results and a comparison on how the relationships are controlled for and how these relate to the company’s strategy and key success factors. The final, third paragraph shows results on why and how the digital platforms use their position and business models to gain a competitive advantage and value creation.

4.1 STRATEGIC CONTEXT AND ORGANIZATION OF

RELATIONSHIPS

The theoretical background covered items on the context and strategy of a firm in paragraphs 2.1 and 2.2, which are also found to be relevant in this research and are therefore covered in this section. From 4.1.1 onward, the cases are highlighted and illustrative quotes from the interviews are shown to substantiate the overall responses. 4.1.3 aims to show differentiating items and similarities between the case companies regarding the strategic context and organization of relationships.

4.1.1 Case company A. All employees of case company A decided on a growth

strategy which is to be achieved by going wholesale as well as remaining in retail. One consequence is the creation of own product lines. Besides taking a more vertical position in the supply chain, the company also expands across the globe. It does so in pursuing its goal of

“lowering the efforts that are needed to buy from us (A1)” by “building a warehouse near the suppliers and gaining a cost advantage (A3)”, thereby being better able to serve customers and

create brand visibility. In order to gain a foothold in new countries, the company collaborates with local platforms, whilst owning a platform of their own. This would seem to strengthen the competition, yet one respondent explains:

“We sell directly to the platform, and we exploit a shop on their platform […] Platforms can be a threat. If everybody sells the same item on Amazon it is just a race to the bottom. We do it differently, we create sell a unique item on their platform, exclusively, and thereby retain our margin (A1)”.

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with all employees and evaluate the plans (A4)”, ultimately creating an overall involvement of

employees. Also, in creation of the strategy the company does not align the strategy with others in the supply chain,

“we create our own product and plan, and then we select the partner (A1)”, despite “you can’t keep on adding partners, we are working towards a set of core partners (A2)”.

In achieving its growth ambitions, company A focusses very much on their own strengths, according to all sources. All the interviewees believe the business culture which consists of a sober mentality, critical view, informal contacts, perseverance and approachability, is one of these strengths and is partly responsible for its success. This results in “common sense,

non-hasty decision making (A1)” and allows to “[…] focus on ecommerce, and keep on doing what we are good at (A3)”. Also, when asked, all interviewees underline the importance of suppliers

or partners in the success as these create opportunities through collaboration, resulting in joint marketing activities that bolster the relationships with partners. Company A resells most products, next to producing products of its own, being active in B2C and B2b: “which is one of

our strengths (A4)”. In their activities, partners are primarily chosen based on quality, “[…] pricing is important but we would not want to bottom it out (A2)”. Similarly, “We are good to our suppliers, in our payments, then we can also ask them for favours (A1)”. This indicates

trust in their partners, who also assist in gaining new supplier relationship, recommendations by them appear to be key in creating trust in their (new) partners. Vice versa, in established (unilateral) contracts freedom to abandon partners is important:

“[…] when you, as a supplier are messing about, it will stop, one opportunity and not again (A1)”.

4.1.2 Case company B. All interviewees of company B agree on high growth in their

perceived strategy of the company. “We are currently deep in our revenue, making it hard to

grow market share, not in the percentages we are used to, in order to maintain our growth, we will have to broaden our offerings (B1)”. Besides the broadening of the product range, the

company seeks to expand abroad, worldwide. In doing so, the company will make use of another platform:

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21 Ultimately, the company will refrain from using other platforms and deploy webstores of their own once brand awareness is created (B1 and B2). Key for the prior and future success of the company is the pricing, good relationships, data of customers, and the CEO:

“[…] the CEO has created a good foundation through his good relations, […], we have good collaborations with our biggest suppliers which you notice each year, and you get something back for it (B3)”.

Upon asking, all interviewees deemed the relations with partners and suppliers highly important, the company relies on its collaborations. “[…] it is important for us to connect

marketing with purchasing, creating collaborative marketing efforts, resulting in revenue growth and cheaper purchasing (B1)”. Yet, the prime strategy of company B is not influenced

by these relations, instead, on a lower level they create annual (collaboration) strategies, emphasizing the success factor of good relations.

Despite the emphasis on good relations, no specific partner selection procedures or partner criteria are established. One interviewee: “the consumer ultimately decides what is

important (B2)”, indicating the customer focus of the company and also driving the partner

selection:

“pricing is the only differentiating factor online, everybody has good delivery term, everybody has good customer support. You can only lose on those fronts (B1)”.

Besides pricing as a selection criterion, company B aims to find partners with whom it can collaborate and gain mutual benefits, through the marketing promotions. Hence, trust in their partners is of high importance, which is created through understanding of each other’s businesses and by high informal contact. Trust is generally based on the commitment of other party, and in exchange company B retains its freedom:

“The only reason for stopping a relation is when the supplier wants to change our pricing policy […] we decide upon our own pricing and strategy; we will not have this imposed by a supplier (B1)”.

4.1.3 Similarities and differences. Both companies are highly focussed on growth,

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whilst in B2B the margins are very low. The higher margins from B2C allows us to be innovative, which would not be possible when we only go for B2B (A4)”. Yet the move towards

wholesale is made to be able to address a bigger market and:

“The goal ultimately is to become less dependent on our suppliers and do more on our own […] this results in creating more products ourselves (A4)”.

Both companies recognize the importance of the relationship with suppliers, yet in company A they are deemed important, whereas company B believes these are highly important, indicating a greater emphasis on relations at company B. For the key success factors, both point towards pricing and growth, yet company B also stresses the importance of their customer data and their ability to connect purchasing and marketing.

4.2 CONTROL OF RELATIONSHIPS IN CONGRUENCE WITH

STRATEGIC CONTEXT

How the case companies’ relationships are controlled are shown in this section, and put in the perspective of the prior section on strategy and organization of relationships. These findings relate to items from paragraph 2.2. From 4.2.1 onward, the cases are highlighted and illustrative quotes from the interviews are show to substantiate the overall responses. 4.2.3 aims to show differentiating items and similarities between the case companies.

4.2.1 Case company A. The focus of company A is on worldwide expansion and

maintaining a healthy mixture of both B2C and B2B, “Our B2C is a little bit bigger than

wholesale […] You do not want to only be in B2B, the margins are lower […] leaving little room to be innovative and to raise prices (A4)”. As mentioned, the main drivers for partner

selection are trust and recommendations by other companies. One respondent described:

“We do record our agreements […] But when we start talks with a new partner, then it is about the feeling we get. That is the most important thing (A2)”.

Generally, these new partners are met at business fairs and the partners connect in an informal manner. Before engaging, little efforts are made to reduce risk: “We never had any issues with

our suppliers […] if one supplier drops out, we have multiple brands and products that can substitute the items (A4)”. This respondent also pointed out that about 15 suppliers make for

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colours, this quality. We then receive a sample and see if they make good on their promises (A1)”. When starting such new project, the purchasing department makes one employee

responsible for the project, giving employees focus points: “Focus gives you time to watch the

details, […] we also see that this increases efficiency, speed and follow up from our side (A2)”.

Also, respondents say that the focus points or increasing employee responsibility results in more (intense) communication, which is believed to result in having the partner to be on edge: “it

makes them aware: wow, they want to have the details spot on”.

This is then also how the relationships are maintained at company A, ad-hoc communication between the suppliers. The company has its partners in developed countries and in Asia, and they interact differently with these. “If we talk about European and American

suppliers, contact is quite informal (A1)”, whereas interaction with Asian countries is more

formal. Another respondent differentiates between purchase and production: “In Europe they

have a collection and you buy from it […] outside of it [Europe] we push more: I want this, can you make this […] there, our own ideas are born (A2)”. This respondent also believes this is

due to culture, and language differences as the proficiency in English in Asia is not that high:

“I can ask someone [in Asia] in English and they say yes, okay. But then, later, he reads it again and puts it in Google Translate and think: I’d rather not. So, we write it down […] But then then we still have to wait and see whether it was according to the agreement, when the product arrives (A2)”.

For these manufacturing suppliers in Asia, the company does additional checks on the order and invoice to control for mishaps. In order to further mitigate risks in the production process, the company does visit some suppliers: “A few suppliers produce our own brand […]

we visit those regularly, for instance to check on product specifications (A4)”. Also, due to

mere purchasing in developed countries, the purchasing conditions are reviewed annually, or the review is triggered by growth sales of product by the specific supplier. The sharing of data to supplier also gets limited: “We hand less data over to our suppliers when we are

manufacturing products ourselves (A1)”. Despite a limited data that is transferred, the company

does trust its suppliers, which can be derived from this example from a respondent:

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4.2.2 Case company B. Company B has a deliberate strategy to refrain from the

wholesale market and focus on retail. In doing so, the key factors for them are pricing, freedom, trust and good relations. The CEO laid the foundations for the early success of the company, according to employees, having prior experiences and already good relations with suppliers, resulting in fair pricing upon starting: “the CEO has good relations with suppliers, he knows

them personally […] We notice that when we bring in a new supplier, we want to create the same sort of relationship (B3)”. Due to the growth in size and reach of the company, the

company moves from purchasing from wholesalers to direct suppliers, brands.

“When we move to direct purchasing, we look at our volume which is really important for negotiations. Further, we look at the demand and whether it is possible to market it well, whether it is a distinctive product (B1)”.

Where possible, the company prefers a similar size and culture, as this creates better understanding between the organizations and well as better collaborations and quicker responses.

The company does not undertake specific risk mitigation actions when establishing the new relationships. “We always have a fallback option, it is not like we can get our product only

from one party (B3)”, the company has established good relations with the four major

wholesalers, creating fallback options for when risk becomes too high. The relations are maintained by having at least annual meetings: “we always have annual meetings. We then

evaluate the year and create a strategy for the coming year (B1)”. Besides annual meetings,

the marketing department of major suppliers have direct contact with the marketing department of company B, relating to the success factor of relating purchasing to marketing:

“… this way they can plan promotions and strategies together, how we advertise, what is being done on socials. So, the supplier has quite an influence in the way we market their product (B1)”.

Besides business contact, the importance of informal contact is stressed, for retaining trust and goodwill: “you will need to get to know each other on a social front, so we regularly drink

a beer (B1)”. Trust is also retained by refraining from using sanctions in contracts, and by being

open in sharing information and data, having little limitations. Upon asking whether the respondent was afraid of opportunistic behaviours through the sharing of data:

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other products we sell. Ultimately, they cut themselves out if you will […] knowledge sharing is good if you know how you stand with each other (B2)”.

This emphasizes, again, the importance of good relations, and openness of the organization.

4.2.3 Similarities and differences. Both firms show differences in their approaches

to control their relationships with suppliers. Company B moves from wholesalers to direct suppliers, primarily driven by pricing in their efforts to find new partners, despite emphasizing the necessity for good relations as a success factor. Company A on the other hand finds its new partners through informal manners, recommendations and business fairs, a more likely manner for companies that emphasize good relations. Neither company take specific risk mitigating actions before engaging in a relationship, underlining the importance of trust in their partners. In maintaining the relations, differences arise. Company A:

“We have sold a lot of similar products, creating more own products are the next steps […] Design is the main thing that differentiates between brands. This is all done internally (A1)”,

The knowledge that company A has of its sales and these products is kept in-house and limits the sharing of knowledge. Also, they take a more formal approach in their contacts in order to mitigate problems in understanding. Contrary, company B shows more integration with its partners, coupling marketing departments, aligning activities, in order to reap its benefits, taking more informal approaches.

“I am not afraid to share data […] if me or my company benefit from sharing information, I have no problems with that (B2)”.

4.3 APPROACHES FOR VALUE CREATION

The specificities of both digital platforms are show in this section, as these emerge as important findings for managing and controlling the interfirm relations. These findings primarily relate to paragraph 2.3 from the theoretical background. From 4.3.1 onward, the cases are highlighted and illustrative quotes from the interviews are show to substantiate the overall responses. 4.3.3 aims to show differentiating items and similarities between the case companies in their approaches.

4.3.1 Case company A. In its growth, company A became market leader in its niche

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“I think we bring in so much data that we can make our own statements [about the market] (A3)”.

The company refrains from sharing a lot of its data to its suppliers. Main feedback items are regarding quality of products: “we relay customer critique, because customers are most

important […], other excessive items, not really. We do send revenue development, whether it is moving positively or not (A3)”. Upon asking whether they would send data concerning

emerging trends on their website(s): “Yes, that depends, or we will make it [the trending

products] ourselves (A1)”.

Suppliers themselves forward more information, sales data and market data are forwarded, as well as ideas that are conceived by the supplier company. This information is made use of by company A by identifying potential products to create themselves. Besides these voluntary actions by suppliers, suppliers are willing to cooperate with company A in providing wanted information:

“You buy certain items at European suppliers where your competitors buy as well. When you wish to buy the item, you do ask whether they have also sold it to a competitor. This might result in making a different choice, although it depends on the product (A2)”.

The good relations give the company opportunities that might otherwise not have arisen.

“There are a few [suppliers] that are very happy with the ambiance and feeling we put out, which show when we are together on fairs, the closeness and dynamic between the employees […] We do this together, no one does this on his own (A2)” – illustrating the feeling of trust that the company

displays to its suppliers.

All interviewees of company A agreed that the interaction with its suppliers creates a competitive advantage, the goodwill creates commercial opportunities: “When a supplier has

something special, then yes, they do call you first (A1)” and “from my perspective, I believe that good payment behaviour can lead to lower purchasing prices, discounts. (A4)”. Further,

the good relation allows for speaking up, voicing concerns earlier and thereby lowering risk, also for the supplier.

4.3.2 Case company B. Company B has acquired a reach of about 1 million people

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27 its suppliers. Upon asking what data and information they share:

“Everything, really […] For instance with our sales figures we can be transparent, good for them so they can sell more items, and good for us too. We like to create an open relationship (B2)”.

Another respondent mentioned:

“The suppliers have a lack of knowledge of online, it is new for them. They are focussed on B2B and tend to not have a strategy towards online […] It is like we educate them with data and knowledge, to show what happens to their products online (B1)”.

Hence, the information is then also used to educate the supplier, to come up with better marketing strategies that will increase sales for both parties. “Through our platform and socials,

the suppliers can see what their consumer is concerned about, what their experience is with their product (B1)”. Also, through platform that company B provides, the company raises an

additional revenue stream of marketing contributions, which creates a greater dependence and integration.

The open relations also show from the perspective of the supplier. Little effort is needed from company B to gain data concerning the market size, share, but also concerning emerging trends. Furthermore:

“They occasionally tell us that some other online store sells a lot of a specific product, from which we notice that we do not and triggers us to improve […] how we change something to improve ourselves (B3)”.

Also, the good relation reduces some risk, as suppliers preventively send information concerning potential backorders, allowing company B to purchase additional stock. Hence, all employees feel the good relations with suppliers create a competitive advantage, and also that both parties exist to help each other:

“You need good collaborations to ultimately make the difference (B1)”.

4.3.3 Similarities and differences. Both companies possess big data about their

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28 revenue stream, to enrich the supply chain and grow the collaboration:

“Through our platform, the supplier can more easily reach and understand their end-user (B1)”.

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5 DISCUSSION AND CONCLUSION

This final chapter first discusses the results of the research. The following paragraph entails the conclusion and answer of the main research, including two propositions that can be tested in future research. Lastly, the limitations of the research are pointed out, as well as suggestions for future research.

5.1 DISCUSSION

This thesis started out with the following research question: How do digital platforms

manage and control interfirm relationships? Findings resulted from observations and

interviews at and with two companies that both make use of a digital platform in their business model. The findings show these digital platforms have different ways of managing and controlling their interfirm relationships. The knowledge that the digital platforms possess can be leveraged differently, seemingly dependent on the strategy of the firm, and thereby affecting how the firms control and manage their interfirm relationships. Knowledge management is one of the three components, besides assembling and matching, that a digital platform has in its business platform, and through which it can generate value (Brousseau & Penard, 2009). Evidence form the findings suggest that the strategy towards these three value generation components of digital platforms, affect the way companies go about their relations, how they engage, manage, and control these. In different stages of the interfirm relation, engaging and execution, different strategies primarily inform the controlling and managing.

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30 knowledge management primarily informs the managing and controlling of their interfirm relations.

The findings show that one company is reluctant to share knowledge whilst the other is more open towards sharing. Company A, which is reluctant in sharing knowledge, uses its knowledge to create business opportunities of its own, creating its own products. Hereby the company uses more formal ways to control their interfirm relations, through contracts and increased control on outputs. Company B, however, uses its knowledge to create joint opportunities with its relations by sharing it. This might cause a knowledge spillover as the company B has less control over the knowledge. This is similar to the Marshall-Arrow-Romer spillover view (Glaeser, Kallal, Scheinkman, & Shleifer, 1992) where the opportunity to exchange ideas lead to innovation and growth. Though, this worsens the span of control of company B and might result in instability of the relation (Inkpen & Beamish, 1997; Johnson, 1999) due to a shift in bargaining power. To retain control over their bargaining power, contrary to company A, company B uses informal, behavioural controls in the form of trust and freedom, emphasizing good relations. Hence, despite being similar in nature and activities, how the companies leverage their knowledge appears to affect the use and type of controls in their relations.

The different approaches that the case companies take for controlling and managing their relations extends research by van der Meer-Kooistra and Vosselman (2000), who found different control patterns for engaging and maintaining interfirm relations. The evidence from the findings show that the studied companies use a mixture of control patterns. For instance, in their contact phase, competitive bidding is characteristic for a market based control pattern, which is similar to the competitive, pricing strategy by company B. Further, trust stemming from reputation and friendship for their trust based control pattern, similar to how company A engages with new partners. Though, in maintaining relations the companies switch control patterns, with company A increasing formal controls through contracts and output control and company B conversely increasing informal controls, trust and good relations. Hence, evidence from the findings show that companies do not stick to one generalizable control pattern, they select their controls based on the dominant goal of their interfirm relationships, which is maximising own value creation for company A, and joint value creation by company B.

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31 avoid instability of their relations (Inkpen & Beamish, 1997; Johnson, 1999). This research shows the knowledge that digital platforms have can be leveraged differently, and have subsequent effects on how digital platforms manage and control, outside of their boundaries. Trust is found to be key in this research for mitigating risks and opportunism, and also appears to create a lower focus on formal controls, yet both are being deployed for controlling relationships as found in prior research (Dekker, 2004). This furthers that understanding of Lui and Ngo (2004) on whether trust, informal controls, substitute or complement formal controls. Furthermore, research complements research by Vosselman and van der Meer-Kooistra (2009) that a balance between accounting for control and accounting for trust is a prerequisite for stable and durable relationships, yet shows that digital platforms have different ways of striking this balance. Dekker, Ding and Groot (2016) view information sharing as a complementary practice in managing of interfirm relations, however, the findings depict a stronger position of information sharing.

5.2 MANAGERIAL IMPLICATIONS

Besides theoretical implications, the research has managerial implications. The findings highlight the importance of knowledge and the control thereof in digital platforms, which can be leveraged in different ways. It can be leveraged in order to increase collaboration with supplier, leading to joint opportunities and thereby greater growth. Or the knowledge can be kept in-house and create own products, thereby creating greater margins. Though, in both occasions the control over the knowledge is critical; if shared too much with suppliers, the bargaining position might get worse; if shared too little, less opportunities for innovation or growth might occur. Hence, if a company can deliberately shape and design relationships, the company can create the ability to integrate knowledge inside and outside a firm’s boundaries (Lorenzoni & Lipparini, 1999). Also, for a stable and durable interfirm relationship, there should be a balance between accounting for control and accounting for trust (Vosselman & van der Meer-Kooistra, 2009). The findings indicate that both a focus on either formal or informal controls can be used to strike this balance, though this depends on the strategy that the company follows. Hence, firms with a collaborative strategy might better strike a balance by focussing on informal controls rather than formal controls.

5.3 LIMITATIONS AND FUTURE RESEARCH

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32 reasons that the approach towards leveraging knowledge affect the controls that are used. However, company B focusses heavily on collaborative communication to create joint opportunities, which is more effective when there is lower integration of control (Mohr et al., 1996). Hence, another reason for focussing more on informal controls by company B might be a resulting of accommodating and facilitating the effectiveness of their collaborative communication. Furthermore, information is regarded as a complementary practice in managing interfirm relations (Dekker et al., 2016), whilst the findings suggest a greater role. This might be due to the bargaining power in knowledge, specific to digital platforms. Future research in this area could provide answers on this topic.

Next, the studied companies have seen great growth, which is possible by capitalizing on their core competencies, but makes that items might not be complete. Growth made that procedures are not documented or done in a prescribed manner; it caused the administrative organization to lag behind, according to some respondents from either company. This is similar to early-stage firms where is found that their MCS are limited (Sandino, 2007). Whether the findings in this research conforms with mature digital platforms is an avenue that can be pursued by future research.

Further, this research was cross-sectional. The companies might have had different approaches towards their suppliers when their success started, which remains unclear as few processes are standardized. Future research might show changes in the behaviour of companies throughout their lifecycle. Clues are given by respondents in this research, as CEOs are deemed important for the start of the success, and as processes have to become standardized by becoming subject to mandatory audits.

Besides the limitations of growth and the cross-sectional research, the markets in which the companies operate might limit the applicability of the findings. Company A operates in a niche in which the customers appreciate secrecy, and is one of the first online movers in this niche. Similarly, some interviewees of company B mentioned the lack of online proficiency in their market. This lack of digitalism in their respective might inhibit the generalizability of the findings. Future research could investigate the strength of digital platform’s knowledge management and sharing across markets with different degrees of digitalization or digital proficiency.

5.4 CONCLUSION

The purpose of this research was to address the following research question: ’how do

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33 a big in the business landscape, they have a great reach for their customer base and due to their size have the ability to source its products worldwide, creating different inter organizational relationships along the way. Besides their ability to sell high volumes, digital platforms can leverage its knowledge, gained by extracting and producing data from their users, and gain additional value. The findings show that digital platforms can leverage this knowledge by keeping it in-house and creating own products, increasing margins, or they can share their knowledge with suppliers to create opportunities through collaborations. In either approach, the relation with other firms is important, however, how interfirm relations are controlled and relate to intrafirm control was ill-addressed by prior research.

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