Download An evolving theory of hybrid distribution: Taming a hostile supply

An evolving theory of hybrid distribution: Taming a
hostile supply network
Jule B. Gassenheimer a,⁎ , Gary L. Hunter b,1, Judy A. Siguaw c,2
The contribution of this paper - research suggests that close relationships between buyers
and sellers can lead to competitive advantage (e.g., Jap, 2001), but has not investigated how one
supplier–buyer channel relationship might impact another such relationship.
Propose that social capital, structural holes, trust, and distributive fairness can be used to
govern the effectiveness of cooperation and competition among hybrid channels and yield
higher performance within the supply network. A corresponding propositional inventory is
offered.
The existence of exchange relationships in the supply networks - Rather than focusing on
a specific set of actors, supply networks are characterized by sets of purposeful and connected
exchange relationships, which may change over time as specific actors are involved,
deactivated, or reactivated in the performance of production tasks.” Andersen and Christensen
(2005, p. 1261)
Gaining the competitive advantage amongst the distributors - Customers, however,
increasingly demand goods and services from a variety of different channels (Alba et al.,
1997; Anders, 2000) and suppliers attempt to address these demands by making their products
available through channels that could potentially overlap (Lassar & Kerr, 1996). Therefore
distributors are likely to be aggravated that their supplier is cooperating with a competitor,
resulting in strained relationships between the supplier and its distributors (Sa Vinhas &
Anderson, 2005). Firms, which prove best at managing the relationships within such
networks, can increase efficiencies while appealing to a number of markets (e.g., Bonner,
Kim, & Cavusgil, 2005). This can establish a competitive advantage.
What is a hybrid supply network? Hybrid distribution cuts across the supply network adding
a horizontal structure, which can include competitive as well as cooperative links between
channels in an attempt to reach an expanded customer market.
We need only look to the popular business press to realize the difficulties suppliers have
encountered when attempting to govern multiple types of distribution within their supply
network. Examples of Compaq, HP are given as well as record companies, in anticipation of
additional profits, began using Internet subscription music services (e.g., Napster 2.0) despite the
expected loss of business to brick and mortar retailers (Burrows, 2003). In all of these examples,
the supplier failed to appropriately manage the impact of its hybrid distribution strategies and
thus damaged its relationship with current members of the supply network.
Hybrid distribution, as a supplier-directed decision, is intended to benefit the supplier by
increasing multi-market competition (Antia, Bergen, & Dutta, 2004; Purohit, 1997). A residual
effect, however, is the potential creation of overlapping markets that may cannibalize existing
distributors' customer bases (cf., Choi, 2003; Russell, 1999). Channel hybridization, therefore,
may disrupt relations within the supply chain and can be viewed as detrimental to one or more
partners (Hibbard, Kumar, & Stern, 2001), potentially threatening the effectiveness of the supply
network (e.g., Anderson & Weitz, 1992).
1.1. Networks, social capital and structural holes
Central to network theory is the positions of parties inrelation to the rest of the network. For
example, a supplier in a supply chain holds a nodal position and may act as a broker connecting
different distributors in the network. These indirect power connections may occur through social
or knowledge linkages that the supplier intentionally helps establish (Burt,
2004). Alternatively, network parties may be relatively isolated or distant, having little or no
connections to others in the network outside of the broker. Where parties in a network have few
or no interconnections, the network is said to have ‘structural holes’ (Burt, 1992). Structural
holes represent two forms of spatial gaps: social relationship distance and knowledge distance
(Roy, Sivakumar, & Wilkinson, 2004).
Social relationship distance incorporates the concept of proximity or feelings of nearness.
Knowledge distance captures the diversity of knowledge between groups.
Suppliers want to increase the structural holes in the distributor–distributor relationships,
suppliers want few structural holes in their supplier–distributor relationships as an absence of
structural holes is indicative of a strong relationship and assures ease of accurate information
transference. To effectively execute this strategy, the supplier must make use of its social capital
through its brokerage function. Suppliers, because they bridge the structural holes between types
of distributors, are perfectly positioned to identify and capitalize on opportunities and to collect
and disseminate a wider variety of information. Social capital represents the value created
between channel partners in the supply network (Burt, 1992)
How do suppliers strengthen their position in the network?
Reducing structural holes between the supplier and distributors and increasing structural holes
between types of distributors strengthen the supplier's brokerage status within the supply
network through an improved supplier–distributor social relationship and information flow,
while decreasing direct information sharing between distribution types. Increasing structural
holes between the supplier and distributors and reducing structural holes between types of
distributors weaken the supply network by diluting the supplier–distributor social relationship
and knowledge sharing, while simultaneously encouraging greater information sharing, and
possibly overembeddedness and redundancy, between types of distribution (Burt, 1992, 2004).
Therefore, suppliers want to sustain their social capital by taking a brokerage position and being
solely responsible for creating and transferring value.
1.2. Trust
In hybrid distribution where customer markets frequently overlap causing greater pressures
between competing distributors operating within the same supplier network, shared goals
become less obvious, coordinated efforts often go astray, and economic self-interest is perceived
to drive supply network decisions. Consequently, the network and social capital literatures
underscore the importance of trust in changing perceptions and sustaining cooperative
relationships within network environments where partners (e.g., multiple distributors) compete
(e.g., Granovetter, 1985; Uzzi, 1997).
Once distributors trust the supplier, cooperation generally follows as distributors feel less
threatened to pursue, what is argued to be, mutually compatible interests (Jap, 1999; Petersen,
Ragatz, & Monczka, 2005). Not surprisingly, trust increases social capital and has been found to
affect simultaneous relationships, at least within an intra-organizational context (Burt, 1992;
Golicic et al., 2003).
1.3. Distributive fairness
Distributive fairness refers to perceptions of fairness based on how earnings and outcomes are
distributed (e.g., Kumar, Scheer, & Steenkamp, 1995; Miles & Klein, 1998). See the model below.
2. A model and propositions for governing hybrid channel interactions
we suggest that trust be used to govern relationships (see also
Andaleep, 1996; Keysuk, 2000).
We propose two crucial factors in sustaining or increasing trust within the channel relationship
when hybrid distribution is introduced to the supply network. These two factors – credible
commitments and distributive fairness – have been selected because of their ability to leverage
value in relationships and encourage cooperation, even when faced with competitive situations
that could be viewed as possible threats (Brown et al., 2000; Ghoshal & Moran, 1996; Ouchi,
1980). Also, propose that credible commitments directly influence distribution fairness and
indirectly influence trust and provide a foundation for ultimately plugging structural holes
between the supplier and distributor, and governing the redundancy or structural holes between
types of distributors (e.g., Lawler & Yoon, 1996).
Credible commitments are specific actions or investments by a supply chain partner that
demonstrate good faith (i.e., trustworthiness) and bind relationships (Anderson &
Weitz, 1992; Frazier & Lassar, 1996). They produce mutual competitive advantages and improve
joint performance and relationship continuity (Jap, 2001). Credible commitments also signal to
distributors that the competition embedded in the hybrid distribution system holds long-term
benefits for all involved in the supply network. The level of investment directed at those
financially weakened by hybridization, when used effectively, increases perceptions of fairness,
initially neutralizes favoritism, and diminishes the likelihood of opportunistic behavior (e.g.,
Anderson & Weitz, 1992). Anderson and Weitz (1992) found a positive relationship between
suppliers' investments in credible commitments and distributors' perceptions of supplier
fairness. Types of credible commitments that suppliers provide to distributors include exclusive
rights to represent the supplier in a particular area, investments in training distributors'
employees, promotions that link suppliers and distributors in the minds of customers, and the
establishment of common ordering systems (Anderson & Weitz, 1992; Fein & Anderson, 1997;
Frazier & Lassar, 1996).
While suppliers should strive to decrease structural holes between themselves and distributors
they should also increase structural holes between distributors. Increasing structural holes
between distributors suggests non-redundancy. Types of credible commitments that suppliers
provide to distributors include exclusive rights to represent the supplier in a particular area,
investments in training distributors' employees, promotions that link suppliers and distributors
in the minds of customers, and the establishment of common ordering systems (Anderson &
Weitz, 1992; Fein & Anderson, 1997; Frazier & Lassar, 1996).
Focus on branded variants and compensation schemes as two alternative credible commitments
for not only creating perceptions of fair solutions, but also regulating directly structural holes
and indirectly trust.
2.2. Branded variants - The use of credible commitments in the form of branded variants directly
increases the distributors' perceptions of the supplier's distributive fairness, increases structural
holes between types of distributors, and indirectly increases distributor trust in the supplier.
Branded variants identify branded products that assume nonequivalent forms across
distribution outlets (Bergen, Dutta, & Shugan, 1996; Shugan, 1989). For example, Lexmark could
produce a traditional line of printers for retailers, such as Best Buy and Circuit City, while
creating a different model for distribution through Internet merchandisers, such as Dell, which
then sell the Lexmark branded printer in a bundled package with its Dell computer.
A branded variant strategy allows the supplier to grant exclusive distribution rights for that
particular variation of the product in that area while maintaining some of the benefits of
intensive distribution via other variations of the same product throughout the market. By
eliminating overlapping markets, the supplier will enhance distributor perceptions of
distributive fairness. We assert that branded variants, when serving as credible commitments
increase the financially weakened distributor's perceptions of the supplier's distributive fairness,
as well as reduce market redundancy between distribution types. In effect, structural holes
between types of distributors are increased while the diversity of markets served is enhanced.
2.3. Compensation schemes - The use of credible commitments in the form of compensation
schemes directly increases the distributors' perceptions of the supplier's distributive fairness,
decreases structural holes between the supplier and the distributors, and indirectly increases trust
in the supplier.
Compensation or reward schemes can also be used as credible commitments to increase
perceptions of the supplier's distributive fairness and decrease structural holes between the
supplier and distributors (Burt, 1992). Compensation schemes, therefore, are designed to
temporarily recompense distribution types for the loss of customers to other distribution types,
thereby, facilitating perceptions of distributive fairness. For example, MetLife typically provides
additional compensation to existing insurers when adding a new channel that competes for the
same customers (Roberts, 1999).
Based on the prisoner's dilemma principle, allmembers of the supply network are potentially
better off if everyone works harder (Axelrod, 1984; Weitzman & Kruse, 1991).
The distributors, after being compensated for lost business, should believe that the supplier
holds their interest at heart and place a greater emphasis on their non-overlapping markets.
Believing in these future returns increases perceptions of the supplier's distributive fairness and
decreases structural holes between the supplier and distributors. If future supply chain returns
are not perceived valuable enough, the temptation exists to free ride the network as one type of
distributor's rewards depends on another type's efforts (e.g. Williamson, 1985).
2.4. Distributive fairness and trust - Distributors' perceptions of the supplier'sdistributive
fairness increase trust in the supplier.
In that channel hybridization often results in overlapping markets with the potential for
detrimental changes in performance outcomes, we turn to distributive fairness, “the perceived
fairness of the distribution of outcomes” (Hauenstein, McGonigle, & Flinder, 2001, p. 39), as a
prerequisite to trust; especially when distributors have been weakened by hybrid distribution.
Equality, need and equity represent the rules of fairness and provide suppliers alternative
approaches for allocating rewards and, in turn, a means of creating alternative perceptions
among types of distributors (e.g., Gassenheimer, Houston et al., 1998).
Another rule of allocation is based upon the needs of each party. In this case, self-interest must
take a backseat to the interests of others, even when doing so damages one's own interest
(Sabbagh, 2001). Should weakened distributors' demand decline, the distribution rule of need
suggests that the supplier compensate these financially weakened distributors for remaining in
the relationship. Distributors with greater needs receive a larger share of the supply network's
surplus resources and rewards. Assisting the financially weakened distributor also reinforces
that the supplier can be trusted to right any wrong between the supplier and the weakened
distributor.
2.5. Trust, structural holes, and cooperation: - The greater the distributor trust in the supplier,
the fewer the structural holes between the supplier and the distributors.
The greater the structural holes between the supplier and distributors, the less the cooperation
between the supplier and the distributors.
The greater the structural holes between types of distributors, the greater the cooperation between
the supplier and the distributors.
The greater the distributor trusts in the supplier, the greater the cooperation between the supplier
and the distributors.
Trust, at some level, is presumed to exist in relationships, which require collaboration and
information sharing (Ahuja, 2000); consequently, trust should characterize the supplier–
distributor relationship. First, research indicates that trusting another is easier than not trusting
(Droege, Anderson, & Bowler, 2003). Second, sanctions can be used against those who choose to
behave in an untrustworthy manner (Brockner & Siegel, 1996), and third, trustworthy behavior
is required in order to maintain the reputation of the organization (Burt & Knez, 1996).
The challenge for the supplier is to prevent trust transfer from the supplier–distributor
relationship to the distributor– distributor relationship. Uzzi (1997) notes that the party who
serves as a bridge between previously unconnected groups may create a union between those
groups. Hence, while the effect of trust on supply chain structural holes has not been previously
investigated, trust transfer between individuals increases the strength of ties between parties
and closes any structural hole that had previously existed (McEvily et al., 2003). Extending this
finding to supply networks suggests that unique information flows within the supply network
would be constrained and the effectiveness of the supply network in terms of non-redundancy
would be weakened (McEvily et al., 2003; Uzzi, 1997). Thus, suppliers must seek to maintain
structural holes between types of distributors when the goal is non-redundancy of information
and markets. To ensure social and knowledge distance between distributors, suppliers must
erect communication barriers between types of distributors, including, but not limited to, the
primary use of different communication channels, a different business language (e.g., traditional
business acronyms are varied from one type of distribution channel to another), and different
formal communication paths (Kelly, 2000).
That is, trust encourages social relationships and the dissemination of knowledge across firms,
while structural holes restrain such behaviors. The joint use of trust in conjunction with the
regulation of structural holes should then foster a cooperative environment between supplier
and distributor, but encourage a competitive but non-zero sum relationship between distributors
(e.g., DiMaggio & Powell, 1983).
2.6. Structural holes and supply network performance - Suppliers that maintain structural
holes between types of distributors by brokering the relationship will improve supply network
performance
Competition alone is often viewed as a lose–lose game in which all players may suffer from a
decline in financial performance. Indeed, Dozoretz and Matanovich (2002) argue that under
strict conditions of competition not only are rivals worse off, but so are customers because
competitors do not have the financial gains to invest in improvements that would benefit
customers. Moreover, competitive actions may lower earnings of their entire industry (Dozoretz
& Matanovich, 2002).
Structural holes can be maintained between distributor types when the supplier serves as the
broker of social relationships and information, in turn, resulting in improved hybrid supply
network performance. For example, Procter and Gamble uses radio frequency identification
(RFID) tags on many of its products. The tags allow the supplier to track product information
throughout the supply network. Procter and Gamble have been pioneers in the field of RFID
(Jewell, 2005). The devices allow suppliers to collect information from different distribution
channels and subsequently they can serve as brokers of such information.
2.7. Cooperation and supply network performance - Cooperation between the supplier and the
distributors will be positively associated with supply network performance.
Increased cooperation between a supplier and its distributors should enhance supply network
performance. An extensive body of research stretching back to the 1960s indicates that channel
cooperation has a positive influence on channel performance (e.g., Mallen, 1967; Pearson, &
Monoky, 1976).
In a more recent era, Jap (1999) and Petersen et al. (2005) offer evidence that close collaboration
between distributors and suppliers can increase profits and serve as a competitive advantage,
while Morris and Carter (2005) find that cooperation improves channel efficiency.
Cooperative partnerships also increase performance by cutting the cost of bringing goods to the
customer (Buzzell & Ortmeyer, 1995).