Strategic Fit in Industrial Alliances: An Empirical Test of Governance Value Analysis

Abstract

The exclusion of firm-specific considerations in the standard (economizing calculus) approach to buyer–supplier ties makes the large variations in the types of contracts used within the same industry unexplainable. This article tests Ghosh and John's (1999) strategizing calculus model that purports to close this gap. The core organizing principle of this model is a three-way fit among firm resources, investments, and governance that yields the highest net receipts. From this principle, the authors derive predictions and test them using data from 193 original equipment manufacturers that engage independent component suppliers. The data show that investments must be aligned with more complete contract terms (e.g., fixed prices, “hard” designs) to yield cost reduction outcomes for all firms. However, investments must be aligned with more incomplete contracts (e.g., cost-plus prices, “soft” designs) to yield end-product enhancement outcomes, but only for firms with relatively small downstream market margins. Firms with larger downstream market margins find that the previous alignment reduces end-product enhancements. These results are robust to checks for common method bias and alternative estimation procedures. The authors discuss practical guidelines for the desired tightness of supplier contract terms from the three-way fit principle.

Strategic performance effects of misaligned formal contracting: The mediating role of relational contracting

“…Cost reductions are the buyer"s net gains from lower production and administration costs that are realized through cooperation with the supplier, such as improved logistics and/or better fit between the supplier"s components and the buyer"s production processes (Ghosh & John, 2005). Such outcomes are simple to specify in a contract ex ante because they can be quantified.…”

“…Outcome types should thus offer insight into the mechanisms through which misalignment affects performance (Ghosh & John, 2005). Hence, testing for effect difference complements mediation tests when assessing a proposed mechanism, and consistency between the results of testing the two hypotheses lends additional confidence to the results.…”

“…The contracting choices made by buyers and sellers thus have different effects on cost reductions compared with end-product enhancements. Ghosh and John (2005) find that contract flexibility (i.e., the extent to which the contract leaves certain aspects open for later negotiation) has different effects on cost reductions and end-product enhancements depending on the level of the buyer"s asset specificity and the buyer"s position in the end-product market.…”

“…Moreover, these two outcome types differ regarding how easily they can be written into contracts ex ante and the ease with which they can be enforced in court ex post (Ghosh & John, 2005). The contracting choices made by buyers and sellers thus have different effects on cost reductions compared with end-product enhancements.…”

“…In contrast to Ghosh and John (2005), we study misalignment between transaction attributes and the level of formal contracting, which is the detail with which explicit contract terms specify the agreement and formalize the parties" roles and contingency plans (Lusch & Brown, 1996;Macneil, 1980). A detailed contract can be either rigid or flexible.…”