Despite the call of supply chain scholars and practitioners to use cooperative strategies in managing buyer–supplier exchanges, many business relationships end up in a dispute between partners (Dant and Schul, 1992 and Jap and Anderson, 2003). Given this potential for opportunism and conflict, buyers and suppliers rely on governance mechanisms to mitigate risks and promote cooperation (Carey et al., 2011, Lumineau and Quélin, 2012 and Tangpong et al., 2010).
Supply chain governance has traditionally been viewed from two theoretical perspectives. The first perspective focuses on relational governance as a mechanism in which interorganizational exchange is regulated through a set of norms that circumscribe acceptable behavior between exchange partners (Heide and John, 1992, Lusch and Brown, 1996 and Macneil, 1980). The relational governance perspective suggests that as buyers and suppliers transact satisfactorily over time, relational norms of flexibility, participation, and solidarity are established (Griffith and Myers, 2005 and Tangpong et al., 2010) maintaining the relationship and curtailing behavior promoting the goals of the parties (Heide and John, 1992 and Zhang et al., 2003). The second perspective, in line with transaction cost economics (Williamson, 1985), highlights the importance of the contract between trading partners and its formal rules of compliance (Lumineau and Malhotra, 2011 and Reuer and Ariño, 2007) to safeguard against opportunism and conflict.
Considerable attention has been devoted to examining whether contractual and relational governance mechanisms act as substitutes or complements (e.g. Carey et al., 2011, Li et al., 2010, Liu et al., 2009 and Lui and Ngo, 2004) on subsequent operational performance or strategic outcomes (see e.g. Cousins et al., 2006, Lawson et al., 2008 and Sanders, 2008). Formal contracts and relational governance have traditionally been viewed as substitutes in terms of their impact on subsequent outcomes. The presence of one governance device would obviate the need for the other (Corts and Singh, 2004, Crocker and Reynolds, 1993 and Gulati, 1995). However, a few studies have considered the possible complementary effects between contractual and relational dimensions (Klein Woolthuis et al., 2005, Poppo and Zenger, 2002 and Ryall and Sampson, 2009). Clearly, the nature of the interplay between the effects of relational and contractual governance dimensions remains equivocal (Liu et al., 2009 and Wuyts and Geyskens, 2005).
While prior research focuses on whether relational and contractual governance act as complements or substitutes on subsequent outcomes, we examine how and when—that is, under which conditions—different governance mechanisms influence buyer–supplier relations when a conflict has actually surfaced. Despite the intention of governance mechanisms to mitigate conflict, disputes will occasionally come about. We thus deal with the individual and joint effects of relational and contractual governance dimensions on the development of the negotiation strategy during dispute resolution.
Our work contributes to this stream by extending earlier conceptualizations of both relational governance and contractual governance. Firstly, prior research has largely used the number of previous transactions as a proxy for cooperative relational governance (Dyer and Singh, 1998). However, the use of this proxy assumes that competitive buyer–supplier relationships are essentially “weeded out” over time, and only cooperative relationships remain. In our study, we take into account the quality of the relational experience—competitive vs. cooperative—rather than using the number of prior transactions, and assess its interplay with contractual governance in influencing the negotiation strategy used in disputes. Secondly, recent studies have illustrated that contractual governance is about more than just control (Malhotra and Lumineau, 2011 and Reuer and Ariño, 2007). Inter-firm contracts may serve two distinct functions: control and coordination. We use this distinction in testing the influence of relational and contractual governance mechanisms individually and collectively on the negotiation strategy used in disputes.
Our empirical analysis employs a unique dataset of 99 buyer–supplier disputes. The data came from approximately 150,000 pages of legal documents relating to supply chain disputes handled by a single European law firm. The data encompass a variety of contractual and relational characteristics, thereby enabling us to study in detail their influence on the negotiation strategy.
The paper is organized as follows. In the first section, we introduce the theoretical background on relational and contractual governance before proposing our model and hypotheses. We then describe the data, methods, and results of our analysis. We conclude with a discussion of the results, limitations, and opportunities for future research.
