conflict dynamics in interfirm relations the …€¦ · rajiv p. dant professor of marketing price...

CONFLICT DYNAMICS IN INTERFIRM RELATIONSHIPS –

AN EXPLORATORY ANALYSIS OF THE IMPORTANCE OF GOVERNANCE

MECHANISMS

Jochen Lengers

Research Assistant

Institute of Strategic Management

Westfälische Wilhelms-Universität Münster

48149 Münster, Germany

Tel: (+49) 251 8338336 Fax: (+49) 251 8338333

Email: [email protected]

Rajiv P. Dant

Professor of Marketing

Price College of Business

The University of Oklahoma

Norman, OK 73019-4001

Tel: (+1) 405-325-4675 Fax: (+1) 405-325-7688


Brinja Meiseberg

Assistant Professor

Institute of Strategic Management

Westfälische Wilhelms-Universität Münster

48149 Münster, Germany

Tel: (+49) 251 8331959 Fax: (+49) 251 8338333


Presented at the

Economics and Management of Networks Conference

(EMNet 2013)

(http://emnet.univie.ac.at/)

Robinson Hotel and University Ibn Zohr

Agadir, Morocco

November 21-23, 2013

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ABSTRACT

The level of conflict present in interfirm relationships largely determines the partners’ ability to realize

relationship performance goals, as conflict can substantially decrease the benefits of cooperation and

can even create costs that largely exceed cooperation benefits. Accordingly, the phenomenon of inter-

firm conflict has received considerable research attention. Yet, although scholars have called emphati-

cally for studying the dynamics of conflict, empirical investigations of interorganizational conflict de-

velopment and factors influencing transitions through various stages of conflict are scarce. Recent

work on relationship dynamics further suggests that since cooperations evolve over time, the effects of

relationship characteristics (e.g., governance mechanisms) on exchange outcomes vary. However, con-

flict dynamics are not yet well understood.

Consequently, we explore the evolutionary dynamics of conflict in interfirm relationships, for what is

ostensibly the first time based on all the five states of conflict development as proposed by the “domi-

nant process model” (Pondy 1967). We argue that the selection and implementation of governance

mechanisms are central drivers of conflict dynamics. We study potential moderating effects of formal

as well as relational governance mechanisms on transitions in interorganizational conflict (“states of

conflict” include latent, cognitive, affective, and manifest conflict that finally result in conflict after-

math). Because relational governance mechanisms enable exchange partners to flexibly adapt to chang-

ing (market) conditions, we propose that relational mechanisms particularly help limit the evolution of

conflict in initial states when partners yet have to frequently adapt cooperation procedures. Conversely,

we expect formal governance to limit conflict transition particularly in later states since scholars point

out that formal structures restrain manifest conflict-laden actions.

Based on extensive longitudinal data from retailers of Germany’s two largest grocery chains, our ex-

ploratory analyses contribute to the literature in several ways: First, this study is one of few that exam-

ine conflict from a process perspective. Thereby, we investigate conflict dynamics and respond to re-

cent calls that highlight the need to capture intertemporal effects in research on interfirm relationships.

Second, while consensus holds that interfirm conflict will (inexorably) pass through several distinct

states, we study the specific drivers that moderate, i.e. limit or speed up, the transition from one state of

conflict to the next. Thus, the findings also help enhance our scholarly understanding of conflicting

results presented in the literature. Third, drawing from relational contracting theory, we integrate the

two distinct concepts of formal and relational mechanisms of interfirm governance, which enables us to

study their effects jointly. Thereby, our results provide insights into the relative importance of these

mechanisms over the conflict “lifecycle”. Fourth, while most empirical research on interfirm relation-

ships is based on data from supplier-buyer relationships in the US, this study contributes to a more

holistic view by offering complementary findings from a European context. Finally, a better under-

standing of the dynamics of interfirm conflict has valuable implications not only for future research

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endeavors, but also for practitioners interested in constructive conflict management practices and effec-

tive governance of interfirm relationships.

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INTRODUCTION

Commercial exchanges between market players are increasingly looked upon in the context of relation-

al structures rather than as arm’s length spot market transactions (Lafontaine and Slade 2010). One of

the inherent characteristics of such relationships is the occurrence of conflicts and disputes between

exchange partners (Frazier 1999). Since it could impair the mutual benefits from the exchange relation-

ship and lower the partners’ commitment to each other, conflict is a widely recognized indicator for

relationship performance (Bradford et al. 2004; Brown et al. 1993; Geyskens et al. 1999; Gilliland et

al. 2010). Therefore, the construct of conflict received a lot of attention in past research on intraorgani-

zational (Amason 1996; Amason and Sapienza 1997; Barki and Hartwick 2001; De Dreu and Weingart

2003; Ensley et al. 2002; Greer et al. 2008; Jehn 1994; Jehn 1995; Jehn and Mannix 2001; Korsgaard

et al. 2008; Langfred 2007; Walton et al. 1969) as well as interorganizational relationships (Bradford et

al. 2004; Brown et al. 1983; Brown et al. 1993; Dant and Schul 1992; Gilliland et al. 2010; Hibbard et

al. 2001; Kaufmann and Stern 1988; Koza and Dant 2007; Malhotra and Lumineau 2011; Palmatier et

al. 2006; Rose et al. 2007; Spinelli and Birley 1998; Winsor et al. 2012).

Studies on the evolution and management of interfirm conflict especially focus on buyer-supplier-

relationships in supply chains (Parmigiani and Rivera-Santos 2011). Given today’s frequently changing

practices in many business environments and the emergence and increasing prevalence of multichannel

strategies that aim at bypassing distributors and retailers and result in higher conflict and destructive

behaviors, understanding and managing the evolution of conflict is becoming crucial for practitioners

in order to maintain their vertical supply chain relationships (Ganesan et al. 2009).

Based on the recognized conceptual framework of Pondy (1967), there is a broad consensus that con-

flicts evolve along five distinct states of (1) latent, (2) cognitive, (3) affective, and (4) manifest conflict

that finally result in (5) the aftermath of conflict (Lewicki et al. 1992; Thomas 1992). Yet, while empir-

ical studies that consider multiple states of conflict are very scarce and despite emphatic calls for inves-

tigating conflict as a process (Frazier 1999; Geyskens et al. 1999), past research primarily focused on

various antecedents and consequences of a single construct of conflict, mostly cognitive conflict, ne-

glecting the dynamics of conflict itself. Although Bradford et al. (2004), Kumar et al. (1995a), Kumar

et al. (1995b), and Winsor et al. (2012) represent few exceptions as they consider two different conflict

states, they also omit examining factors that may affect the transition from one state of conflict to the

next and therefore give at most moderate hints for managing the dynamics of conflict effectively. Yet,

considerations concerning the evolution of boundaries over time and investigations in the context of

relationship dynamics will be of major significance within interorganizational research (Palmatier et al.

2013). In order to take account of contingent factors, we follow the suggestions of Ganesan et al.

(2009) and Gilliland et al. (2010) and take a look upon the way firms organize and manage their supply

chains, reflected by the governance structure and the underlying contract, respectively, that should keep

the exchange parties from behaving in an opportunistic manner and thus may decrease interorganiza-

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tional tension and conflict (Brown et al. 2000; Dahlstrom and Nygaard 1999; Jap and Ganesan 2000;

Palmatier et al. 2007; Sheng et al. 2006).

Several scholars, e.g. Klein and Leffler (1981) with their concept of self-enforcing contracts, Heide

(1994) in terms of his theory of “market versus non-market governance”, or more recently Baker et al.

(2002) and Gibbons et al. (2005) with their integrative framework of “relational contracts” stress the

inherent incompleteness of formal rules and the importance of informal patterns. The concept of rela-

tional contracts recognizes that agreements between firms are governed and enforced not only by for-

mal hierarchy, rules and authority, but also by holding out the prospect of benefits from future transac-

tions, assured by informal agreements and unwritten relational norms between firms that affect behav-

iors of exchange partners (Gibbons 2005). Hence, following the claims of scholars of organizational

economics as well as of marketing and supply chain management, we simultaneously consider formal

procedures and informal patterns, as reflected by the presence of bureaucratic structures and relational

norms, in order to explain behaviors within interfirm exchanges (Baker et al. 2002; Dahlstrom and

Nygaard 1999; Gilliland et al. 2010; Heide 1994; Lafontaine and Slade 2010; Poppo and Zenger 2002).

Consequently, this paper explores the dynamics of interfirm conflict under the contingent influence of

formal and relational governance mechanisms used to organize and manage supply chains. Hence,

based on longitudinal data on wholesaler-retailer relationships of two major German grocery chains,

we test several hypotheses on the moderating effects of formal bureaucratic structures and relational

governance. Our research contributes to existing literature in several ways. First, capture the dynamics

of conflict this study empirically incorporates ostensibly for the first time all five states of conflict in

reference to the well-established model by Pondy (1967) and thus indeed examines conflict as a pro-

cess. Thereby we depart from Brown et al. (2006) and follow Palmatier et al. (2013) by drawing on

relationship dynamics. Second, while it is pretty much accepted that conflict will inexorably pass

through these states, we focus on variables that may moderate, i.e. limit or speed up, the transition from

one state of conflict to the next, which improves our understanding of prior insights. Third, taking the

view of relational contracting theory, we simultaneously incorporate the formal hierarchy of authority

as well as relational patterns as mechanisms to govern interfirm exchanges and affect partner’s behav-

iors, complying with Lafontaine’s and Slade’s (2010) call for empirically enriching the underexplored

phenomenon of relational exchange. Fourth, while most research has drawn on data from supplier-

buyer relationships on the US market, this study contributes to a more holistic view since the analyses

are based on a European context. Finally, a better understanding of the dynamics of conflict provides

valuable implications not only for future research, but also for practitioners in terms of managing con-

flict by effectively governing and organizing supply chains.

This paper is organized as follows: We begin with an overview about relevant literature. Then we pre-

sent hypotheses, and describe the data, measures and methods. We offer results from our exploratory

analyses. The final section concludes.

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THEORETICAL BACKGROUND

CONFLICT IN SUPPLY CHAINS

The phenomenon of interfirm conflict in supply chains has been studied in the context of various sup-

plier-buyer relationships such as the distribution of automobiles, beer, chemicals, clothing, engine

parts, furniture, groceries, household durables, pharmaceuticals, and sports products (Brown et al.

2006; Brown et al. 1993; Chung et al. 2006; Hibbard et al. 2001; Jap and Ganesan 2000; Kumar et al.

1995a; Lado et al. 2008; Lusch 1976a; Palmatier et al. 2007; Rosenberg and Stern 1971; Runyan et al.

2010; Samaha et al. 2011; Subramani and Venkatraman 2003; Wilkinson 1981). Past studies include

research on diverse antecedents and consequences of interfirm conflict. While early literature has fo-

cused on goal incongruences (Hunger and Stern 1976; Stern et al. 1973) and the exertion of coercive

power (Brown et al. 1983; Gaski 1984; Lusch 1976b; Wilkinson 1981) as being crucial for the emer-

gence of conflict, more recent studies have emphasized the impact of asymmetric dependence, mutual

commitment, transaction costs, or the presence of a relational mindset surrounding the exchange part-

nership (Brown et al. 2006; Gilliland et al. 2010; Hibbard et al. 2001; Jap and Ganesan 2000; Kumar et

al. 1995a; Kumar et al. 1998). In addition, a range of studies and meta analyses of supply chain litera-

ture on the consequences of interfirm conflict emphasized detrimental effects of conflict on economic

and relational outcomes (Anderson et al. 1998; Bradford et al. 2004; Brown et al. 2006; Brown et al.

1993; Geyskens et al. 1999; Palmatier et al. 2006; Runyan et al. 2010; Wilkinson 1981) and hence es-

tablished interfirm conflict as an indicator for relationship performance (Brown et al. 1993; Geyskens

et al. 1999; Gilliland et al. 2010; Jap and Ganesan 2000; Palmatier et al. 2007).1 In this context, Gane-

san et al. (2009), Koza and Dant (2007), and Malhotra and Lumineau (2011) point out in particular the

long-lasting impact of conflict on the success and endurance of supply chain relationships. Echoing the

early statements of Pondy (1967), many scholars called for studying the occurrence of conflict as a

process along discrete states (Frazier 1999; Geyskens et al. 1999). Hence, within this paper we draw on

the work of Pondy (1967) as well as on more recent research on conflict theory and conceptualize the

consecutive states of latent, cognitive, affective, and manifest conflict that result in the status of conflict

aftermath as follows2: We conceptualize latent conflict as underlying conditions that cause subsequent

1 Since we focus on relationships between wholesalers and their retailers that persist over the time of examina-tion, we do not consider relationship termination or breach, which may constitute the climax of conflict-laden action. Thus, efficient breach, i.e. the case where higher conflict in terms of breaking a contract might be benefi-cial for one or both of the partners, is out of scope in regard to this study (Macneil 1982). Hence, we view con-flict as a “cost of participation” (Pondy 1967) which results from partners’ intentions that are not perfectly corre-lated and which may be reduced by adequate governance mechanisms (MacLeod, 2002). Since conflict can gen-erate costs imposed on relationship partners, we assume that, ceteris paribus, it reduces relationship performance and hence constitutes an adequate outcome measure for relationship success, in line with previous empirical management studies (Geyskens et al. 1999; Gilliland et al. 2010; Palmatier et al. 2007). 2 There are numerous models that deal with conflict, negotiation, and litigation within an organizational context. Yet, the model of Pondy (1967) takes a comprehensive view that allows for investigating conflict between de-partments or even entire firms. Moreover, it not only considers forms of overt conflict laden behaviors, but also

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perceptions of conflict (Winsor et al. 2012). These conditions include structural aspects like competi-

tion over scarce resources between supply chain partners, e.g. competition for customers in a multi-

channel context, goal divergence, e.g. seeking concentration versus diversification of sources of sup-

ply, and autonomy needs of supply chain agents that clash with their principals’ control efforts (Pondy

1992). Empirical studies that explicitly consider the state of latent conflict are virtually absent, never-

theless most antecedents of conflict that where examined in past research fit into the scope of one of

the three underlying conditions as they deal with bargaining and competition between suppliers and

buyers, goal alignment, and mutual exertion of control (Ganesan et al. 2009; Gaski 1984; Hunger and

Stern 1976; Jap and Ganesan 2000). In contrast, research on cognitive conflict is quite widespread and

looks upon disagreements between supply chain partners over how to achieve mutual goals and how to

address business challenges (Bradford et al. 2004).3 We conceptualize affective conflict as non-task

related discrepancies reflected by anger and frustration toward an exchange partner (Jehn and Mannix

2001; Kaufmann and Stern 1988; Kumar et al. 1995a). Along with cognitive conflict, affective conflict

constitutes an intermediate state between latent conditions and manifest conflict behavior. Manifest

conflict is characterized by overt harmful behavior that actively impedes the exchange partner’s goals

(Winsor et al. 2012). Finally, the conflict aftermath represents retained hostilities toward the other par-

ty in the sequel to prior conflict episodes (Kaufmann and Stern 1988). Though the state of conflict af-

termath is quite unattended (Malhotra and Lumineau 2011), previous articles stress the long-lasting

effect of conflicts on supply chain relationships (Koza and Dant 2007).

Scholars of intraorganizational conflicts have already applied multiple of these constructs in one and

the same study in order to clarify their relationships and to disclose their sequential properties, primari-

ly in the context of decision making in teams and team performance (Amason and Sapienza 1997; De

Dreu and Weingart 2003; Ensley et al. 2002; Greer et al. 2008; Jehn 1995; Jehn and Mannix 2001).4

includes antecedent conditions and after-effects of conflict (Lewicki et al. 1992). Thus, it goes beyond a static perspective on relationships and facilitates the attempt to take a dynamic approach for analyzing interorganiza-tional boundaries (Winsor et al. 2012). Finally, within the literature of conflict and conflict management the mod-el of Pondy “subsumes much of the subsequent research literature on the types and causes of conflict” (Lewicki et al. 1992), as many of the subsequent models focus on parts of Pondy’s model in specific contexts. Summed up, Pondy’s model is the dominant approach to describe the evolution of organizational conflict and therefore it is selected within this study. 3 Thus, we depart from most studies of the 70’s and 80’s and do not assign disagreements to the state of manifest conflict. In this manner, we tie in with the early thoughts of Pondy (1967) and with more recent approaches of inter- as well as intrafirm conflict literature (Amason and Sapienza 1997; Ensley et al. 2002; Jehn 1995; Kumar et al. 1995a). 4 During our argumentation, especially throughout the development of distinct hypotheses, we will occasionally draw on intraorganizational studies, as empirical evidence particularly for time-varying properties of conflict evolution is more extensive in this context. However, Pondy’s (1967) model of conflict was initially developed for relationships within firms, but afterwards frequently adopted to an interorganizational context, giving cause that the underlying assumptions are transferable to a large extent. Moreover, the concept of relational contracting, which this study refers to, gives an integrative framework for relational contracts between and within firms (Gib-bons 2005). That is, under consideration of specific disparities, e.g. due to ownership issues, assumptions con-cerning governance by means of formal and informal mechanisms are not limited to intraorganizational settings (Heide 1994).

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Yet, while it goes nearly unchallenged that conflict inexorably passes through distinct states, studies in

the context of interorganizational relations examining the dynamic process of conflict are scarce

(Frazier 1999). The prevailing approach is to explain the evolution of conflict using one overarching

construct, disregarding the need for differentiation. Against this background, it may not seem surpris-

ing that scholars come to unexpected and contradicting results in regard to antecedents and conse-

quences of conflict. For example, Brown et al. (2006) found that explicit contracting tends to increase

conflict, though it was initially designed as an instrument to reduce conflict. In contrast, other scholars

like Samaha et al. (2011) stress the conflict suppressing abilities of explicit contract utilization. Though

Bradford et al. (2004) and Kumar et al. (1995a; 1995b) represent first approaches toward a more nu-

anced view on the construct of interfirm conflict by simultaneously paying attention to cognitive and

affective conflict, they give no hints concerning the dynamics of conflict development in terms of the

transition between those two conflict states. By extending their approaches to cover multiple states of

conflict and by considering contingent factors that influence the transition of conflict, this study might

resolve contradictions on how to manage conflict in supply chains effectively.

RELATIONAL CONTRACTING IN SUPPLY CHAINS

In supply chain relations, as in most other interfirm affairs, contracts determine the way companies

organize and govern their transactions (Brown et al. 2006; Ferguson et al. 2005; Lusch and Brown

1996).5 Contracts and governance structures are being implemented to ensure goal alignment between

the exchange parties, to restrain them from behaving in an opportunistic manner, and to facilitate coor-

dination (Brown et al. 2000; Dahlstrom and Nygaard 1999; Gundlach and Achrol 1993; Jap and

Ganesan 2000; Lado et al. 2008; Malhotra and Lumineau 2011; Palmatier et al. 2007; Samaha et al.

2011). Research on interorganizational relations has adopted diverse theoretical perspectives including

agency theory, transaction cost economics, and relational exchange theory (Heide 1994; Lafontaine

and Slade 2010). While agency theory provides the framework to consider interfirm boundaries as

principal-agent-relationships and deals with hazard mitigating contract design from an ex ante perspec-

tive, research on post contract opportunism mainly relies on transaction cost economics and relational

exchange theory (Ferguson et al. 2005; Frazier 1999; Lusch and Brown 1996; Malhotra and Lumineau

2011; Parmigiani and Rivera-Santos 2011). At a very general level, primary empirical marketing stud-

ies can be separated into two different areas. Much of early supply chain research is solely dealing with

either transaction cost economics or relational exchange theory, that is, only considering one side of the

story (Dwyer and Oh 1988; Kaufmann and Stern 1988). The main purpose of supply chain governance

from a transaction cost economics’ point of view is to impose mechanisms that restrain the exchange

parties from behaving in an opportunistic manner in order to safeguard relationship specific invest-

5 Vice versa, we abide by Williamson (2000) and define governance structures as the “institutional frameworks within which the integrity of contract is decided.”

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ments, i.e. investments that have a greater value inside than outside of a specific relationship. While

market exchanges miss the possibility to economize on specific investments due to the risk of onetime

transactions, transaction cost theory considers governance by formal authority and hierarchy to be ap-

propriate for mitigating opportunistic behaviors (Dahlstrom and Nygaard 1999; Gilliland et al. 2010;

Gundlach and Achrol 1993; Lafontaine and Slade 2010; Williamson 1985). Within this line of re-

search, empirical studies identified inter alia factors such as formal hierarchy of authority, bureaucrati-

zation of channel structures, authoritative enforcement and utilization of written contracts, or the use of

formal incentive systems as answers to the risk of losing relationship specific investments (Cannon et

al. 2000; Dwyer and Oh 1988; Dwyer and Welsh 1985; Gundlach and Achrol 1993; Subramani and

Venkatraman 2003). Early transaction cost theory was charged with overestimating the power of hier-

archy while neglecting the abilities resulting from the social embeddedness of relational exchanges to

govern interfirm ties (Granovetter 1985). Originating from contract law and initiating another emergent

stream of research, Macneil (1980) in the course of his theory of relational exchange developed a set of

contract norms that characterize transactions by capturing their relational embeddedness. Following

Macneil (1980), exchanges range from discrete spot market transactions to relational exchanges fea-

tured by well-marked relational contract norms. Similar to the effect of formal hierarchy, the preva-

lence of these informal relational norms suggested by Macneil (1980) is assumed to mitigate hazards

arising from incomplete contracts among supply chain firms as they express adequate behavioral

guidelines, signal stability, and give reasons for repeated beneficial interactions (Cannon et al. 2000;

Dahlstrom and Nygaard 1999; Jap and Ganesan 2000; Noordewier et al. 1990). Empirical research has

often made reference to relational governance in terms of “relationalism” (Palmatier et al. 2007), “so-

cial embeddedness” (Uzzi 1999), or the general prevalence of relational or social norms within inter-

firm exchanges (Achrol 1997; Brown et al. 2009; Cannon et al. 2000; Gundlach and Achrol 1993).

While initial empirical studies on relational governance focused on operationalization and measure-

ment challenges (Kaufmann and Dant 1992), subsequent research has recognized relational governance

as effective informal mechanism for managing, coordinating, and controlling actions and behaviors of

supply chain partners (Brown et al. 2000; Cannon et al. 2000; Gundlach and Achrol 1993; Jap and

Ganesan 2000; Lusch and Brown 1996).

Klein and Leffler (1981), Heide (1994), and more recently Baker et al. (2002; 2011) focused on self-

enforcing and relational contracts, respectively, and thereby incorporated formal and informal mecha-

nisms. Baker et al. (2002) and Gibbons (2005) utilized game models to illustrate the impact of poten-

tially upcoming benefits on current behavior of supply chain partners acting under incomplete explicit

contracts. In case of the occurrence of uncontracted-for events, expectations of benefits in the course of

future transactions prevent supply chain partners from jeopardizing the relation through opportunistic

behaviors and thus offer an incentive to perform in accordance with norms and standards characterizing

the relation (Baker et al. 2002; Baker et al. 2011; Brown et al. 2000; Gibbons 2005; Lafontaine and

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Slade 2010; Levin 2003). Therefore, relational norms that signal potential for future exchanges func-

tion as enforcement mechanisms on their own (Heide 1994; Klein 2000). That is, the concept of rela-

tional contracts recognizes that agreements between firms are governed and enforced not only by for-

mal hierarchy of authority, but also by holding out the prospect of benefits from future transactions,

assured by informal agreements and unwritten relational norms between firms that affect current be-

haviors (Gibbons 2005; Gilliland et al. 2010; Macneil 1980).

Consequently, more recent studies adapt the perspective of relational contracting theory and aim at

explaining the occurrence of multiple, i.e. formal and relational, governance mechanisms simultane-

ously (Brown et al. 2009; Gilliland et al. 2010; Jap and Ganesan 2000; Koza and Dant 2007;

Subramani and Venkatraman 2003), or try to clarify the interplay between these mechanisms (Cannon

et al. 2000; Poppo and Zenger 2002). While some articles suggest a substituting linkage between for-

mal and relational governance (Boyle et al. 1992; Ferguson et al. 2005; Gundlach and Achrol 1993),

the emergent consensus in contracting theory is that formal and relational mechanisms facilitate each

other (Baker et al. 2002; Dahlstrom et al. 1996; Poppo and Zenger 2002). However, within this study

we do not side solely with one of these perspectives. Rather, we recognize that these mechanisms are

intertwined and thus follow the call of other scholars to explore formal and relational mechanisms in

combination (Gibbons 2005). For conceptualizing formal interfirm governance structures as represent-

ed by hierarchical authority and formal rules and procedures, we draw on the construct of bureaucrati-

zation (Dwyer and Welsh 1985). In this context, formal governance is typically composed of three

distinct dimensions: formalization, centralization, and participation. We define formalization as the

degree to which procedures and decisions within the supply chain follow well-defined rules and guide-

lines. Centralization is the degree to which decisions are made by formal authorities, in our case the

degree to which decisions are solely made by the wholesaler. Finally, we conceptualize participation

as the degree to which the wholesaler and the retailer are involved in each other’s decision processes

(Boyle and Dwyer 1995; Dwyer and Oh 1987; Paswan et al. 1998). Capturing the notion of informal

mechanisms, we define relational governance as the degree to which actions and behaviors of exchange

partners are controlled, coordinated and regulated through various relational norms that characterize

the exchange between firms (Dahlstrom and Nygaard 1999; Heide and John 1992; Koza and Dant

2007). Though, based on Macneil (1980) scholars are in agreement about the fact that the construct of

relational governance is multidimensional, yet opinions on which norms should be included in order to

build the construct of relational governance diverge. Within this study we focus on the most common

contracting norms of mutuality, flexibility, and solidarity (Achrol 1997). Mutuality describes the char-

acteristic that benefits and costs between exchange parties are equally shared over time. Flexibility

represents the willingness of parties to an exchange to make adjustments in case of changing circum-

stances. Finally, solidarity depicts the degree to which the exchange parties ascribe importance to sus-

taining the relationship (Kaufmann and Dant 1992).

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In addition to including multiple governance mechanisms, we address the fact that few studies empiri-

cally consider the effects of relational contracting, i.e. multiple governance mechanisms, on perfor-

mance outcomes (Gilliland et al. 2010; Jap and Ganesan 2000; Lafontaine and Slade 2010). According-

ly, we explore the effect of formal and relational mechanisms on the dynamics of interfirm conflict.

HYPOTHESES

Echoing Ganesan et al. (2009), firms have to answer the question of how they can support and sustain

their supply chain relations with suppliers and customers in case of increased levels of conflict. This

question is relevant for managers especially against the backdrop of emerging multichannel strategies.

As the governance structure reflects the way firms organize and manage their supply chains, we draw

on relational contracting theory and develop a set of hypotheses that predicts a contingent influence of

formal and relational governance mechanisms on the transition of interfirm conflict. We go along with

other scholars, who argue that governance mechanisms keep exchange parties from behaving in an

opportunistic manner and thus may decrease interorganizational tension and conflict (Brown et al.

2000; Dahlstrom and Nygaard 1999; Jap and Ganesan 2000; MacLeod 2000; Palmatier et al. 2007;

Sheng et al. 2006). Within our hypotheses, we depart from prior research in that we consider multiple

governance mechanism as well as multiple states of conflict. That is, we contribute to a more nuanced

and comprehensive perspective on effects of supply chain governance and dynamics of interfirm con-

flict. In addition, we refer to existing empirical evidence in order to derive distinct hypotheses.

FORMAL GOVERNANCE AND THE TRANSITION OF INTERORGANIZATIONAL CONFLICT

The ability of formal supply chain governance to decrease tension and conflict between exchange par-

ties has been examined in a few studies (Brown et al. 2006). Yet, empirical results on the effectiveness

of formal governance mechanisms are heterogeneous, prompting the calls for a more differentiated

approach of investigation. Similar to Kumar et al. (1995a) on the basis of bilateral deterrence theory or

Malhotra and Lumineau (2011) by stressing the ability of formal provisions to coordinate reciprocal

actions, many authors lay emphasis on the conflict mitigating effects of hierarchical and formal gov-

ernance. By contrast, others found formal governance to reinforce the evolution of conflict, mostly

arguing that hierarchical instructions clash with agent’s own intentions (Brown et al. 2006; Gilliland et

al. 2010).

The latter concerns may primarily affect the progression of latent conflict as it deals with goal incom-

patibilities, drives for autonomy and competition over scarce resources. Because formal regulations and

central decisions made by the wholesaler may differ from the retailer’s intentions, the latter will be

especially sensitive for goal incongruences (Gilliland et al. 2010). Moreover, negligence of retailer’s

regional market knowledge throughout central decision processes as well as formalized procedures

may limit the retailer’s ability to take regional needs into account and thus restricts her drives for au-

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tonomy, making disagreements on how to master nascent challenges more likely (Heide et al. 2007).

Autonomy needs may be a relevant issue since the retailers considered within this study act as inde-

pendent companies and therefore flexibility and self-reliance are probably regarded as prerequisites for

enduring boundaries. Further empirical evidence reveals a positive relation between formal governance

and cognitive conflict (Brown et al. 2006), suggesting that formal governance speeds up the transition

from latent into cognitive conflict.

H1a. High formal governance in interfirm relationships accelerates the transition from latent to cogni-

tive conflict.

Besides increasing the likelihood of disagreements, constraining the autonomy of independent retailers

may cause tension and frustration between the exchange parties. For example, Heide et al. (2007)

showed that the imposition of formal regulations is being perceived as intrusive, thereby raising the

likelihood of tension and hostility to emerge. Thus, we assume that formal governance not only trans-

forms latent conditions into perceived discrepancies on tasks and strategies, but also leads to affective

dissonances.

H1b. High formal governance in interfirm relationships accelerates the transition from latent to affec-

tive conflict.

In their study on the effects of supplier fairness on retailer’s sentiments Kumar et al. (1995b) underline

the positive effect of suppliers’ procedural fairness, measured among others in terms of impartiality

and explanation, on relationship quality including affective attitudes. Thus, guidelines and formal rules

in case of disagreements about tasks may contribute to objective and replicable solution processes and

thus may limit the emergence of affective sentiments. Additionally, Bradford et al. (2004) and Samaha

et al. (2011) found support for their assumptions that hierarchical authority and formal rules favor rela-

tionship satisfaction and suppress a detrimental development of cognitive conflict.

H1c. High formal governance in interfirm relationships limits the transition from cognitive to affective

conflict.

Most literature suggests that the more a conflict escalates, the more adequate bureaucratic and formal

governance is in order to reduce the aggravation of conflict (Brown et al. 2000; Heide 1994; Koza and

Dant 2007). Formal governance mechanisms function as clear guidelines and procedures specifying the

rights and obligations of exchange partners with clear consequences in case of violation of these obli-

gations (Jap and Ganesan 2000; Kumar et al. 1995a; Winsor et al. 2012). Therefore obvious interfer-

ence with behaviors that oppose the other party’s interests or goals in response to disagreements about

tasks and opinions is assumed to be less likely when formal rules are present. Thus, formal regulations

may inhibit the worsening of cognitive disputes towards manifest behaviors.

H1d. High formal governance in interfirm relationships limits the transition from cognitive to manifest

conflict.

13

Hibbard et al. (2001) argue that affective sentiments towards an exchange partner are associated with

the attribution of negative developments to the partner’s actions rather than to oneself’ s actions or

environmental circumstances. In case of greater implementation of formal governance and hierarchical

authority, the wholesaler exerts stronger influence on the retailer’s actions as well as on the general

development of the relationship (Heide et al. 2007). This may even increase the attribution of destruc-

tive processes and setbacks to the wholesaler’s action. That is, under the presence of affective conflict

formal governance may increase the retailer’s tendency to ascribe destructive developments to actions

and instructions of the wholesaler. Therefore, disagreements over how to complete tasks and how to

address upcoming challenges become more likely, so that formal governance exacerbates the transition

from affective to cognitive conflict. In support of this chain of reasoning, Samaha et al. (2011) found

strong support for their assumption that formal rules aggravate the detrimental effects of affective sen-

timents such as perceived unfairness.

H1e. High formal governance in interfirm relationships accelerates the transition from affective to cog-

nitive conflict.

Similar to the effect of formal governance on the transition of cognitive into manifest conflict, we as-

sume that formal governance will be appropriate to inhibit the transition of affective into manifest con-

flict, as literature suggests formal governance to be more effective in order to manage conflict the more

progressed it is (Brown et al. 2000; Heide 1994; Koza and Dant 2007; Samaha et al. 2011). Formal

guidelines and obligations as well as clearly specified consequences of impeding behaviors may en-

courage exchange partners to refrain from manifest conflict-laden behaviors and actions (Jap and

Ganesan 2000; Kumar et al. 1995a; Winsor et al. 2012). Obvious interference will be less likely to

evolve from affective conflict in the presence of specified rights and rules.

H1f. High formal governance in interfirm relationships limits the transition from affective to manifest

conflict.

Concerning the effect of formal governance mechanisms on the way manifest conflict shapes the rela-

tionship in the aftermath of conflict, we adhere to Malhotra and Lumineau (2011), who stress the im-

portance of reliable coordination and decision-making process for the time subsequent to manifest in-

terfirm conflicts. However, they come to different results regarding the interrelation between formal

provisions and the willingness of the exchange parties to continue the relationship, depending on

whether these provisions are predominantly intended for promoting control or coordination. Yet, be-

cause of potentially dysfunctional informal coordination mechanisms resulting from manifest conflict

behaviors (Koza and Dant 2007), we stress the latter function of formal provisions and assume formal

governance structures to determine the willingness of supply chain partners to continue the relationship

since these mechanisms reliably promote coordination.

14

H1g. High formal governance in interfirm relationships reduces effects of manifest conflict on conflict

aftermath.

The effects of aftermaths of preceding conflicts on future developments of supply chain relationships

and on upcoming conflicts have been neglected to the greatest extend (Malhotra and Lumineau 2011).

With reference to Koza and Dant (2007), literature suggests a greater use of formal governance subse-

quent to the occurrence of conflict.

H1h. High formal governance in interfirm relationships limits the transition from aftermaths of preced-

ing conflict episodes into latent conflict.

RELATIONAL GOVERNANCE AND THE TRANSITION OF INTERORGANIZATIONAL CONFLICT

Similar to formal governance, research is interested in the ways relational governance affects the evo-

lution of conflict in supply chain boundaries for a long time. There is a broad consensus that relational

norms characterizing an exchange play a crucial role in determining behaviors and actions of supply

chain partners in the course of conflict episodes (Kaufmann and Stern 1988; Lusch and Brown 1996;

Noordewier et al. 1990; Sheng et al. 2006). In doing so, most investigations emphasize the conflict

limiting effect of relational governance. For example, in an intraorganizational context Amason and

Sapienza (1997) or Jehn and Mannix (2001) in their longitudinal study found that relational behaviors

and shared values of team members limit the evolution of conflict. Empirical evidence of interfirm

interactions also suggests conflict mitigating effects of relational norms (Bradford et al. 2004; Brown et

al. 2006; Brown et al. 2000; Gilliland et al. 2010; Palmatier et al. 2007; Spinelli and Birley 1998).

Thereby, scholars argue that exchange partners eschew relationship-damaging behaviors and opportun-

istic actions that might threaten relationship continuity as long as the boundary promises valuable fu-

ture transactions, reflected by high levels of relational norms (Brown et al. 2000; Palmatier et al. 2007;

Spinelli and Birley 1998). This view corresponds to the assumptions of relational contracting theory to

the extent that neither party to an exchange seeks to renege on given arrangements as long as desired

behaviors will be rewarded sufficiently in form of future benefits (Baker et al. 2002; Lafontaine and

Slade 2010). Yet, some studies give reasons to believe that relational governance may play a minor

role in case of advanced conflict states as a conflictive relationship climate constrains bilateral commu-

nication and concerted behaviors (Koza and Dant 2007). Moreover, Antia and Frazier (2001) found

that the efficacy of relational norms is limited if the risk of losing relationship specific investments

increases. This may be the case if partners take actions that aim at harming and impeding each other,

giving reasons for a more nuanced view on the conflict mitigating impact of relational governance.

However, dynamics within primary states of conflict are assumed to be significantly affected by rela-

tional mechanisms. Relational exchanges rely on self-enforcing structures; thus, performance is se-

cured through expectations of future benefits, that is, behaviors of supply chain partners do not have to

15

be controlled in every detail, but are assumed to comply with mutual requirements (Klein 2000). In

other words, the prevalence of relational governance allows for autonomous actions and enables retail-

ers to flexibly adapt to local market conditions (Brown et al. 2006). Therefore, disagreements arising

from latent conditions such as goal incongruences and limited autonomy are less likely to occur.

H2a. High formal governance in interfirm relationships limits the transition from latent into cognitive

conflict.

For the transition from latent into affective conflict we assume a similar impact of relational govern-

ance. Relational governance may lead to increased tolerance towards goal incongruences in awareness

of the fact that both parties are interested in sustaining the relationship (Kaufmann and Stern 1988).

Intraorganizational research delivers corresponding empirical incidents. For example, Amason and

Sapienza (1997) established an inverse relation between mutuality and affective conflict.

H2b. High formal governance in interfirm relationships limits the transition from latent into affective

conflict.

Relational governance and the presence of strong relational norms may lead to the tendency to attribute

disagreements or different opinions to conditions beyond the partner’s control rather than to blame the

partner herself (Heide et al. 2007; Kaufmann and Stern 1988). Furthermore, relational governance re-

duces the likelihood that disagreements are ascribed to self-seeking interests and self-serving intentions

(Amason and Sapienza 1997; Ensley et al. 2002).

H2c. High formal governance in interfirm relationships limits the transition from cognitive into affec-

tive conflict.

Scholars agree to the greatest extent that exchange partners eschew relationship-damaging behaviors

and opportunistic actions that might threaten relationship continuity as long as the boundary promises

valuable future transaction, reflected by high levels of relational norms (Brown et al. 2000; Palmatier et

al. 2007; Spinelli and Birley 1998). Thus, cognitive conflict will be less likely to lead to conflict-laden

behaviors in exchanges with greater implementation of relational governance since they foster relation-

ship termination (Malhotra and Lumineau 2011).

H2d. High formal governance in interfirm relationships limits the transition from cognitive into mani-

fest conflict.

Hibbard et al. (2001) argue that affective sentiments towards an exchange partner are associated with

the attribution of negative developments to the partner’s actions rather than to oneself’ s actions or

environmental circumstances. Nevertheless, implementation of relational governance may increase the

parties’ confidence that the partner will act in line with the expected norms of behavior and thus aims

at long-term relationship success (Anderson and Weitz 1992; Kaufmann and Stern 1988). Therefore,

16

opinions over how to complete tasks and how to address upcoming challenges may be discussed less

intensely in the confidence of mutual long-term orientation.

H2e. High formal governance in interfirm relationships limits the transition from affective into cogni-

tive conflict.

As it is the case with the transition from cognitive conflict into the manifest state, we assume that rela-

tional governance limits the escalation of affective conflict as well. We similarly draw our arguments

from the fact that conflict-laden behaviors might jeopardize benefits from future transactions (Brown et

al. 2000; Palmatier et al. 2007; Spinelli and Birley 1998). Thus, supply chain partners refrain from such

actions and avoid situations of manifest conflict. Yet, affective conflict is more detrimental to relation-

ship satisfaction than cognitive dissonances, since it interferes with relationship performance (De Dreu

and Weingart 2003). Thus, compared to the worsening of cognitive conflict, we assume relational gov-

ernance to be less effective but still influencing in regard to managing the further development of affec-

tive conflict.

H2f. High formal governance in interfirm relationships limits the transition from affective into mani-

fest conflict.

As the escalation of conflicts leads to a destruction of relational bonding and to a decrease in mutual

long-term orientation (Anderson and Weitz 1992; Antia and Frazier 2001; Malhotra 2004; Palmatier et

al. 2007; Samaha et al. 2011), the impact of relationalism on the transition from one conflict state to the

next may be of minor significance in regard to higher states of conflict. Empirical evidence delivers

several hints for this assumption. For example, Kaufmann and Stern (1988) were not able to establish a

link between the presence of relational norms and the perception of retained hostility subsequent to a

manifest dispute between exchange partners. Moreover, Gundlach et al. (1995) suggest that the occur-

rence of manifest opportunistic actions undermines relational sentiments among exchange partners,

that is, relational governance becomes less effective. Therefore, we assume that exchange partners have

less confidence in relational norms after manifest disputes have arisen. Hence, we do not expect a sig-

nificant effect of relational governance on the development of aftermaths resulting from manifest con-

flict.

H2g. High formal governance in interfirm relationships does not affect the relationship between mani-

fest conflict and its aftermaths.

There is little research on the effects of preceding conflicts on future relationship quality. However,

relational governance allows for flexible and autonomous actions of retailers and wholesalers. Thus,

finally, we consider the autonomy enabling properties of relational governance and suggest that after-

maths of preceding disputes will be less likely to lead to latent conflict if supply chain partners turn to a

relational mindset again.

17

H2h. High formal governance in interfirm relationships limits the transition from aftermaths of preced-

ing conflict episodes into latent conflict.

SAMPLE, MEASURES, AND METHODS

SAMPLE

Germany’s two major grocery chains, accountable for one half of Germany’s annual turnover in food

retailing, distribute their products through company owned as well as through approximately 6,000

independent stores per chain. To test our hypotheses we use longitudinal data from a sample of inde-

pendent retailers, who provide information concerning their relationship to their respective wholesaler.

The data was gathered through a nationwide self-administered online questionnaire directed at store

owners. This way we aim at minimizing potential key-informant biases since owners are assumed to be

fully knowledgeable about their business with the wholesaler (Bagozzi and Phillips 1982). We collect-

ed the data in two waves with six months of temporal separation (t=1, t=2). Each wave included an

initial invitation that held out the prospect of a summary of the survey results and a reminder that we

sent out two weeks after the initial invitation to all non-respondents. All respondents were assured that

their data was treated confidentially and anonymously to ensure that our analysis does not suffer from

social desirability bias. 3,776 store owners were initially contacted by telephone in order to query for

their willingness to participate; 1,490 were subsequently invited to the online survey via email; 730 of

them answered the questionnaire (49.0%). Excluding questionnaires with missing data resulted in an

adjusted sample size of 567 in the first wave (38.1%). These store owners were again contacted for the

second wave survey, yielding a final sample of 157 store owners that answered both surveys complete-

ly (currently, additional data collection is still in progress).

As we collected self-reported data from a single source, there are concerns of common method

bias(Kreiser et al. 2010). The study controls for common method bias in the self-reported variables

using Harman’s single factor test. The test yielded more than one factor, and no factor accounted for a

majority of variance. Thus, according to (Podsakoff et al. 2003), common method bias is not an issue.

Moreover, the longitudinal study design minimizes common method bias, as well as potential endoge-

neity issues (Podsakoff et al. 2003).

MEASURES

All of our reflective measures are based on existing literature and have already been applied in the

context of supplier-buyer relationships.6 Items were minimally adjusted in order to fit the retailer-

wholesaler background. Retailers that were involved in the questionnaire development provided valua-

6 The only exception is the measure for manifest conflict that has been applied in an intrateam context (Barki and Hartwick 2001).

18

ble insights into the relevance of items and wording of questions. In addition, a pretest assessed item

comprehensibility. For both survey waves we use identical measurement items and collect information

for all endogenous and exogenous variables. All perceptual measures were anchored using 7-point

Likert scales. We employed explorative factor analysis in order to ensure that the items solely load on

their respective factor.7 Using equal weights, we summed and averaged the scores of the items. In case

of second-order constructs, we initially set up reliable first-order factors and repeated the procedure for

second-order factors.8 We present the complete range of scales and items as well as their sources and

reliabilities in the Appendix.

Conflict states. While most studies employ a general construct of conflict, there is no homogenous

approach to the measurement of the different states of conflict (Brown and Day 1981; Malhotra and

Lumineau 2011; Rosenberg and Stern 1971). Consequently, we conducted an extensive literature re-

view and compared existing operationalizations on an item basis in order to carve out commonly used

and recognized measures that fit our conceptualizations. In the case of latent conflict, we draw on the

early operationalization of Etgar (1979), because, to our knowledge, his study is the only one that sim-

ultaneously accounts for the three components of latent conflict, i.e. competition over scarce resources,

goal divergence, and autonomy needs. Cognitive conflict is probably the most considered measure of

conflict. Prior studies used variant terminologies for cognitive conflict, such as perceived conflict or

task conflict, all of them emphasizing on disagreements and different opinions on how to address up-

coming challenges.9 In order to measure cognitive conflict, we abide by Kumar et al. (1995a) and

Bradford et al. (2004). To capture non-task related discrepancies just as anger and frustration toward an

exchange partner reflecting affective conflict, we refer to the measures of Kumar et al. (1995a) and

Jehn and Mannix (2001). To stress the characteristic of manifest conflict in terms of knowingly inter-

fering with the goal attainment of the exchange partner, we use the measure of interference established

by Barki and Hartwick (2001). Within this study, the measure of manifest conflict is the only one with

a non-supply-chain origin. Nevertheless, their operationalization fits the common conceptualization of

manifest conflict best (Winsor et al. 2012). Hence, we decided to embed Barki’s and Hartwick’s (2001)

items into the context of supply chains. Finally, we adopt the measures of Kaufmann and Stern (1988)

so as to scale the impact of past conflicts in terms of conflict aftermath.

Formal governance. In accordance to our conceptualization, we measure the implementation of formal

governance as a second-order construct, composed by measures of formalization, centralization and

participation. In doing so, we make use of the widely recognized measures developed by Dwyer and

Welsh (1985).

7 Items that were excluded from the further analysis are reported in the Appendix 8 Since we are going to employ structural equations modeling after finalizing data collection, we replace this procedure using confirmatory factor analysis 9 Therefore, the today’s conceptualization and operationalization of cognitive conflict corresponds to the former operationalization of manifest conflict that most of the studies assessed in the 70’s and 80’s.

19

Relational governance. Just as formal governance, we view relational governance as a second-order

construct, reflected by several sub-dimensions. As mentioned earlier, literature disagrees on which

relational norms have to be considered to compound the construct of relational governance. As men-

tioned earlier, within this study we focus on the most common contracting norms of mutuality, flexibil-

ity, and solidarity (Achrol 1997). We take up Lado et al. (2008), Brown et al. (2000), and Kaufmann

and Dant (1992) on operationalization and measure the subdimensions using their items.

METHODS

As our analyses are basically of an exploratory nature, with additional data collection still being in

progress, we report preliminary evidence deduced from analysis.10 For the moment, we will rely on

descriptive statistics as well as Kruskal-Wallis analysis of variance in order to test our hypotheses. We

employed autonomous Kruskal-Wallis tests for each interface between different conflict states and for

each governance mechanism (according to our hypotheses).11 For each test we utilize data from t=1 for

preceding conflict states (independent variable(s)) and moderators, and data from t=2 for subsequent

(dependent) variable(s).12 The Kruskal-Wallis test is a non-parametric approach that tests whether two

or more samples originate from the same distribution. We performed a median-split for each of the t=1

variables and drew up four distinct categories for each Kruskal-Wallis test that divide the wholesaler-

retailer relationships into four different classes according to their respective conflict level and govern-

ance structure. For example, for the interface between latent and cognitive conflict we considered the

degree of latent conflict and relational governance and build up the following categories: LowCon-

flictLowRelational, HighConflictLowRelational, LowConflictHighRelational, and HighConflictHigh-

Relational. Then, the Kruskal-Wallis test ranks the values for cognitive conflict, calculates average

ranks for each category, and looks for significant differences between the categories. In case of rejec-

tion of the null hypothesis that there are no differences between the categories, post-hoc tests are em-

ployed to evaluate which of the categories differ from each other significantly. By comparing the rela-

tion between categories dependent on the manifestation of relational governance, we test our hypothe-

ses in regard to the effect of relational governance on the linkage between latent and cognitive con-

flict.13 We go ahead for the other interfaces and for formal governance accordingly.

10 Structural equation modeling will be employed once data is complete. 11 We employed Kruskal-Wallis tests because some of our conflict scales were slightly skewed. 12 Though Kruskal-Wallis tests could not clarify the direction of causality, we assume conflict at t=1 to be logi-cally independent from conflict at t=2 due to the natural order of events. 13 In case there is a significant difference between LowConflictLowRelational and HighConflictLowRelational but no significant difference between LowConflictHighRelational and HighConflictHighRelational, we suggest that the relationship between (in this case) latent conflict and cognitive conflict is dependent on the characteristic of relational governance, i.e. relational governance moderates the transition.

20

RESULTS

Table 1 presents Correlations for the study variables.

<< Insert Table 1 about here >>

While correlations among different conflict states show (expected) positive correlations, relational

governance seems be negatively correlated with all states of conflict. Moreover, formal governance

seems to have only modest influence on conflict. Results of Kruskal-Wallis test support this impres-

sion. While higher levels of preceding states of conflict at t=1 are related to higher levels of subsequent

states of conflict at t=2 (p<0.05), formal governance seems to have neither direct nor indirect effects

(in terms of moderation) on the transition of conflict, rejecting H1a – H1g (see table 2).


However, in case of low levels of formal governance, the groups of low and high levels of conflict

aftermath at t=1 are significantly different (p<0.01) in regard to the levels of latent conflict at t=2; i.e.

higher levels of conflict aftermath at t=1 are related to higher levels of latent conflict at t=2 (see table

2h). By contrast, these groups are not significantly different if the cooperation is characterized by high

levels of formal governance. That is, in support of H1h the transition from conflict aftermath to latent

conflict seems to depend on the level of formal governance that is present within the interfirm relation-

ship.

Results for relational governance indicate an extensive influence of relational governance on the transi-

tion of interfirm conflict (see table 3). In support of H2 a, b, d and f, relational governance seems to

limit the transition of conflict. That is, exchange partners refrain from further escalation of conflict in

case the relationship is characterized by high levels of relational norms. Moreover, in case of high la-

tent conflict, relational governance seems to directly affect the evolution of affective conflict. Similar

results occur for the evolution of manifest conflict under the condition of high cognitive conflict.


While we found no evidence to support H2 c, e and h, relational governance seems to strengthen the

relationship between manifest conflict and remaining aftermaths. That is, the escalation of conflicts not

only undermines relational mindsets (H2g) among exchange partners (Gundlach et al. 1995), but dis-

appointment at conflict laden behaviors in spite of the presence of relational norms may even increase

hostilities.

21

CONCLUSION

In the course of emerging multichannel relationships, conflict between exchange partners is more likely

to arise and thus threatens continuity of potentially beneficial supply chain relationships. Hence, schol-

ars assume effective management and handling of interorganizational conflict to become key factors in

shaping successful long-term relationships (Ganesan et al. 2009). Organizations have to address these

challenges in form of appropriate governance structures since these structures determine the way firms

organize and manage their supply chains, define mechanisms for coordinating actions among exchange

partners, and thus constitute adequate instruments to secure sustaining supply chain relationships

(Ganesan et al. 2009). Therefore, in this study we take a more nuanced view on interorganizational

conflict and examine conflict as a process of five distinct states (Pondy 1992). Additionally, we draw

on relational contracting theory and make a case for considering formal and relational governance

mechanisms when investigating the dynamics of conflict. Specifically, we argue that formal and rela-

tional governance mechanisms affect the dynamics of interfirm conflict in that they limit or accelerate

the transition between distinct states of conflict. Formal governance mechanisms such as bureaucratic

structures were assumed to limit the transition between advanced states of conflict due to reliable

mechanisms of coordination on the one hand, but to accelerate the development of initial states due to

autonomy constraints on the other hand. However, our preliminary evidence suggests that formal gov-

ernance has only modest influence on conflict dynamics as it may function as a reliable orientation for

coordination procedures in the aftermath of conflict. Relational mechanisms and the presence of rela-

tional norms were assumed to primarily affect the evolution of initial conflict states since they hold out

the prospects of mutual profits and thus motivate to refrain from harmful behaviors. Yet, preliminary

evidence could not confirm a successive decline in the effect of relational governance on conflict dy-

namics, but rather stressed the importance of relational governance across the whole conflict cycle.

More sophisticated methodology may yield more pronounced results.

First, this study empirically incorporates all five states of conflict, ostensibly for the first time, in refer-

ence to the recognized model of Pondy (1967) and hence takes a step towards capturing the dynamics

of relationships and procedural characteristics of conflicts. Second, while prior studies proceed from

the assumption that conflict inexorably passes through distinct states, we argue for considering contin-

gent effects that limit or accelerate the transition from one state of conflict to the next. Third, by simul-

taneously incorporating the formal hierarchy of authority as well as informal relational patterns as

mechanisms to govern interfirm exchanges, we take a more holistic view on supply chain governance

and thereby comply with Lafontaine’s and Slade’s (2010) call for empirically enriching the underex-

plored phenomenon of relational exchange. Moreover, we enrich empirical research on interorganiza-

tional relationships since we focus on a European context during the data ascertainment. Finally, a

better understanding of the dynamics of conflict provides valuable implications not only for future

22

research, but also for practitioners in terms of managing conflict by adequately governing and organiz-

ing their supply chains.

Despite our efforts to avoid biases that surround many empirical studies, our investigation is subject to

limitations. First, we gather data considering only one side of the dyad. Since wholesalers’ perceptions

of existing conflict and employed supply chain governance might differ from retailers’ perceptions,

research that takes both perspectives into account would allow for additional insights. Second, while

we draw on relational contracting theory and thus examined the effect of formal and informal govern-

ance mechanisms on the dynamics on conflict, there may be other relationship characteristics moderat-

ing the transition of conflict. Hence, this study represents only a first step towards a more nuanced

view on conflict evolution. The approach of considering supply chain governance is reasonable, but

non-exhaustive. For example, several scholars argue that the dependence structure among supply chain

partners affects the occurrence of conflict (Kumar et al. 1995a). Thus, the transition of one state of

conflict to the next may be contingent on whether the dependence structure is symmetric or asymmet-

ric. We propose this issue for future research. Third, our sample consists of supply chain relationships

between independent grocery retailers and their respective wholesalers. These boundaries are assumed

to be durably persistent and hence are able to cope with severe levels of conflict. That is, generalizabil-

ity of our study is restricted to more complex interfirm boundaries that show at least minimum levels of

long-term orientation. Therefore, to a certain extent results may be applicable to other contexts, e.g. to

franchise relationships or car dealer networks, but should be treated with caution in the context of

short-term exchanges. Finally, while we measured our variables with six months of temporal separa-

tion, there is no consensus on response cycles of conflict states. That is, our approach of data gathering

may not support an analysis of effects with longer response cycles. As already called for by Palmatier

et al. (2007), future research should take a closer look at response cycles of key interorganizational

factors in order to facilitate longitudinal examinations.

23

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APPENDIX

MEASURES14

Relationalism α = 0.78 (Lado et al. 2008)

A. Mutuality (α = 0.72) 1. Even if costs and benefits are not evenly shared between us in a given time period, they balance out

over time. 2. We each benefit and earn in proportion to the efforts we put in. 3. Our business usually gets a fair share of the rewards and cost-savings in doing business with the

wholesaler. 4. In our relationship, none of us benefits more than one deserves.

B. Solidarity (α = 0.83) 5. We are committed to preserving a good working relationship with the wholesaler. 6. We consider the wholesaler to be our business partner. 7. We conscientiously try to maintain a cooperative relationship with the wholesaler. 8. Our relationship with the wholesaler is more important to us than profits from individual transac-

tions.

C. Flexibility (α = 0.87) 9. We would willingly make adjustments to help out the wholesaler when faced with special problems

or circumstances. 10. We would gladly set aside the contractual terms in order to work through difficult situations with

the wholesaler. 11. The wholesaler willingly makes adjustments to help us out when we are faced with special prob-

lems or circumstances. 12. The wholesaler gladly sets aside the contractual terms in order to work with us in difficult times.

Bureaucratization α = 0.74 (Dwyer and Welsh 1985)

A. Centralization (α = 0.77) 1. My firm has to ask the wholesaler before we make significant strategic decisions. 2. In our dealings with the wholesaler, even quite small matters have to be referred to someone higher

up to answer. 3. My company is usually discouraged from making changes in the wholesaler's sales programs with-

out checking with their rep first. 4. For many facets of running my firm, we yield to recommendations of the wholesaler. 5. Many aspects of my business are run according to the strong suggestions of the wholesaler.

B. Formalization (α = 0.75) 6. My firm's dealings with the wholesaler are subject to a lot of rules and procedures stating how var-

ious aspects of my business are to be done. 7. There are standard procedures to be followed in my firm's dealings with the wholesaler.

14 7-point scales (1 = “strongly disagree” and 7 = “strongly agree”) unless otherwise indicated; *Items were delet-

ed from the final analysis

29

8. In dealing with the wholesaler, my company's responsibilities are clearly specified. 9. My firm's relationship with the wholesaler is governed primarily by written contracts. 10. There are precise ways outlined for ordering, receiving, and merchandising the products from the

wholesaler. C. Participation (α = 0.76) 11. The wholesaler plays an active role in the decisions we make regarding the retailing of its products. 12. We consult the wholesaler concerning inventory decisions. 13. Our ideas for selling and servicing are welcomed by the wholesaler. 14. The wholesaler regularly asks our opinions and suggestions for improving its products and ser-

vices. Latent Conflict αt=1 = 0.82, αt=2 = 0.84 (Etgar 1979)

A. Goal Divergence (αt=1 = 0.82, αt=2 = 0.83) 1. The wholesaler often wants to prod us to buy more products than are good for us. 2. The wholesaler often complains that we do not want to improve our modes of operation after its

standards. 3. The wholesaler often demands that we concentrate fully on its brands, while it is to our advantage

to add major sidelines to its business. 4. It is our major function to advise our customers as to which product they should choose while our

wholesaler considers our major function to be developing relations between customers and our wholesaler’s products.

B. Lack of Autonomy (αt=1 = 0.66, αt=2 = 0.70) 5. My wholesaler influences strongly my choice of other suppliers. 6. Through couponing, discounting, and advertising, etc., our wholesaler practically dictates to us the

type of promotion we are able to use in our stores. 7. We are forced to adjust our inventories according to the decision of our wholesaler. 8. We have little choice on pricing but to follow our wholesaler’s suggested retail price.*

C. Competition over Scarce Resources (αt=1 = 0.73, αt=2 = 0.73) 9. The wholesaler restricts considerably our use of cooperative advertising monies. 10. The wholesaler often ties-in less desirable items with orders for choice items. 11. When opening new stores, our wholesaler often fails to consider and to protect our sales territory

adequately. 12. The wholesaler often attempts to sell directly via internet or discounters and in this way to circum-

vent us. Affective Conflict αt=1 = 0.94, αt=2 = 0.94 (Jehn and Mannix 2001; Kumar et al. 1995a)

When our firm reflects on the relationship with the wholesaler, our firm feels…

1. …anger 2. …frustration 3. …resentment 4. …hostility* 5. …ill will* 6. …tension

30

Cognitive Conflict αt=1 = 0.92, αt=2 = 0.92 (Bradford et al. 2004; Kumar et al. 1995a)15

1. We disagree over ideas on how to achieve our goals. 2. We disagree over how to complete tasks. 3. We have differences of opinion over how to address problems. 4. We experienced differences of opinion.* 5. The wholesaler and our firm have major disagreements on certain key issues.

Manifest Conflict αt=1 = 0.87, αt=2 = 0.88 (Barki and Hartwick 2001)

1. The wholesaler often blocks or prevents me from attaining my business goals and objectives. 2. The wholesaler often blocks or prevents me from taking action in the way that I desire. 3. The wholesaler often blocks or prevents me from managing my business in the way I desire.

Conflict Aftermath αt=1 = 0.75, αt=2 = 0.70 (Kaufmann and Stern 1988)

1. Past conflicts do not affect our current relationship.* 2. I am still very angry at the wholesaler because of the events surrounding past disputes 3. If the tables were turned, I would like to see my organization get even for how we were treated by

the wholesaler during the course of past disputes 4. If we had to do it all over again, we would not do business with the wholesaler.

15 7-point scales (1 = “very infrequently” and 7 = “very frequently”)

Table 1: Correlations

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

(1) Relational Governance 1

(2) Formal Governance 0.245**

(3) Latent Conflict (t=1) -0.324** 0.304** 1

(4) Latent Conflict (t=2) -0.311** 0.096 0.646** 1

(5) Cognitive Conflict (t=1) -0.339** 0.045 0.612** 0.481** 1

(6) Cognitive Conflict (t=2) -0.235** -0.014 0.480** 0.618** 0.546** 1

(7) Affective Conflict (t=1) -0.355** 0.057 0.532** 0.449** 0.519** 0.481** 1

(8) Affective Conflict (t=2) -0.356** 0.033 0.514** 0.648** 0.514** 0.684** 0.701** 1

(9) Manifest Conflict (t=1) -0.481** 0.138 0.677** 0.559** 0.593** 0.406** 0.629** 0.603** 1

(10) Manifest Conflict (t=2) -0.382** 0.100 0.552** 0.750** 0.495** 0.620** 0.541** 0.704** 0.646** 1

(11) Conflict Aftermath (t=1) -0.193* 0.079 0.381** 0.296** 0.357** 0.440** 0.455** 0.489** 0.507** 0.387** 1

(12) Conflict Aftermath (t=2) -0.230** 0.074 0.346** 0.473** 0.297** 0.451** 0.486** 0.572** 0.429** 0.500** 0.451** 1

Significance levels (two-tailed): **p<0.01; *p<0.05

32

Table 2 (a-h): Results for Kruskal-Wallis post-hoc-tests (formal governance)

a) Test Variable: Cognitive Conflict; Grouping Variable: Latent Conflict

Group 1 Group 2 Latent Con-

flict Formal Gov-

ernance Latent Con-

flict Formal Gov-

ernance Test statistic Standard deviation

Adjusted sig-nificancea

Effect of governance struc-ture

1. Low Low High Low 40.901 10.578 ** -

2. Low High High High 37.873 10.618 **

3. Low Low Low High -7.478 10.578 - -

4. High Low High High -10.507 10.618 -

b) Test Variable: Affective Conflict; Grouping Variable: Latent Conflict


flict Formal Gov-

ernance Latent Con-

flict Formal Gov-


Adjusted significancea


1. Low Low High Low 43.932 10.029 ** -

2. Low High High High 27.455 10.066 *

3. Low Low Low High 3.414 10.029 - -


c) Test Variable: Affective Conflict; Grouping Variable: Cognitive Conflict

Group 1 Group 2 Cognitive

Conflict Formal Gov-

ernance Cognitive Conflict

Formal Gov-ernance Test statistic

Standard deviation



1. Low Low High Low 35.069 9.802 ** -


3. Low Low Low High -0.906 9.352 - -

4. High Low High High 4.205 10.162 -

33

d) Test Variable: Manifest Conflict; Grouping Variable: Cognitive Conflict



ernance Cognitive Conflict


Standard deviation



1. Low Low High Low 39.848 10.128 ** -


3. Low Low Low High 10.782 9.663 - -


e) Test Variable: Cognitive Conflict; Grouping Variable: Affective Conflict

Group 1 Group 2 Affective


ernance Affective Conflict


Standard deviation



1. Low Low High Low 31.378 10.442 * -


3. Low Low Low High -9.054 9.575 - -


f) Test Variable: Manifest Conflict; Grouping Variable: Affective Conflict



ernance Affective Conflict


Standard deviation



1. Low Low High Low 34.376 10.229 ** -


3. Low Low Low High -0.704 9.380 - -


34

g) Test Variable: Conflict Aftermath; Grouping Variable: Manifest Conflict

Group 1 Group 2 Manifest


ernance Manifest Conflict


Standard deviation



1. Low Low High Low 28.863 9.404 * -


3. Low Low Low High -0.094 9.404 - -


h) Test Variable: Latent Conflict; Grouping Variable: Conflict Aftermath

Group 1 Group 2 Conflict Af-

termath Formal Gov-

ernance Conflict Af-

termath Formal Gov-




1. Low Low High Low 34.223 10.472 ** Transition dependent on formal governance 2. Low High High High 16.247 10.416 -

3. Low Low Low High 17.681 9.431 -

- 4. High Low High High -0.304 11.368 - ** p< 0.01, * p<0.05, aaccording to the Bonferroni method Example for interpretation (table 1 h)): in regard to the level of latent conflict, the group with low conflict aftermath and low formal governance is significantly different from the group with high conflict aftermath and low formal governance. However, the group with low conflict aftermath and high formal governance is not significantly different from the group with high conflict aftermath and high formal governance. That is, higher levels of conflict aftermath lead to ho higher levels of latent conflict only in case of low formal governance.

35

Table 3 (a-h): Results for Kruskal-Wallis post-hoc-tests (relational governance)

a) Test Variable: Cognitive Conflict; Grouping Variable: Latent Conflict


flict Relational

Governance Latent Con-

flict Relational

Governance Test statistic Standard deviation

Adjusted sig-nificancea


1. Low Low High Low 37.859 19.540 ** Transition dependent on relational governance 2. Low High High High 26.134 10.823 -

3. Low Low Low High -11.319 10.578 -

- 4. High Low High High -23.044 10.786 -

b) Test Variable: Affective Conflict; Grouping Variable: Latent Conflict


flict Relational

Governance Latent Con-

flict Relational





3. Low Low Low High -12.241 10.029 - Direct effect dependent on

conflict level 4. High Low High High -28.455 10.226 *

c) Test Variable: Affective Conflict; Grouping Variable: Cognitive Conflict


Conflict Relational

Governance Cognitive Conflict

Relational Governance Test statistic

Standard deviation



1. Low Low High Low 35.104 9.805 ** -


3. Low Low Low High -16.347 9.619 - -


36

d) Test Variable: Manifest Conflict; Grouping Variable: Cognitive Conflict


Conflict Relational

Governance Cognitive Conflict


Standard deviation




3. Low Low Low High -13.667 9.939 - Direct effect dependent on

conflict level 4. High Low High High -35.344 11.099 **

e) Test Variable: Cognitive Conflict; Grouping Variable: Affective Conflict


Conflict Relational

Governance Affective Conflict


Standard deviation



1. Low Low High Low 37.974 10.249 ** -


3. Low Low Low High -13.246 9.853 - -


f) Test Variable: Manifest Conflict; Grouping Variable: Affective Conflict


Conflict Relational

Governance Affective Conflict


Standard deviation




3. Low Low Low High -13.536 9.662 -

- 4. High Low High High -30.602 11.692 -

37

g) Test Variable: Conflict Aftermath; Grouping Variable: Manifest Conflict

Group 1 Group 2 Manifest

Conflict Relational

Governance Manifest Conflict


Standard deviation



1. Low Low High Low 30.407 12.532 - Transition dependent on relational governance 2. Low High High High 36.732 10.625 **

3. Low Low Low High -6.325 10.283 -

- 4. High Low High High 3.779 10.599 -

h) Test Variable: Latent Conflict; Grouping Variable: Conflict Aftermath

Group 1 Group 2 Conflict Af-

termath Relational

Governance Conflict Af-

termath Relational




1. Low Low High Low 23.713 10.166 - -

2. Low High High High 20.201 11.061 -

3. Low Low Low High -18.867 9.492 - -

4. High Low High High -22.379 11.644 - ** p< 0.01, * p<0.05, aaccording to the Bonferroni method Example for interpretation (table g)): in regard to the level of conflict aftermath, the group with low manifest conflict and low relational governance is not significantly different from the group with high manifest conflict and low relational governance. However, the group with low manifest conflict and high relational governance is significantly different from the group with high manifest conflict and high relational governance. That is, higher levels of manifest conflict lead to ho higher levels of conflict aftermath only in case of high relational governance.

conflict dynamics in interfirm relations the …€¦ · rajiv p. dant professor of marketing price...

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