SNF-REPORT NO. 04/01 INTERORGANIZATIONAL DEVELOPMENTAL PROCESSES: GOVERNANCE AND INTERACTION IN CONTINUOUS NEGOTIATED AGREEMENTS by Håvard Ness SNF-project No. 6607: "Vertical integration, retail chains and cooperative relations in the Norwegian retail industry". The project is financed by The Research Council of Norway FOUNDATION FOR RESEARCH IN ECONOMICS AND BUSINESS ADMINISTRATION BERGEN, MARCH 2001 © Dette eksemplar er fremstilt etter avtale med KOPINOR, Stenergate 1, 0050 Oslo. Ytterligere eksemplarfremstilling uten avtale og i strid med åndsverkloven er straffbart og kan medføre erstatningsansvar. ISBN 82-491-0123-5 ISSN 0803-4036 ii ACKNOWLEDGEMENTS This report was finished last summer in July, and was at that time submitted to my dissertation committee (for the degree Dr. Oecon at the Norwegian School of Economics and Business Administration). It was put on wait until the defense had been held, and is now due to publication as part of SNF’s report series. The study has been a one man show in many respects, however some people should receive due recognition. In particular, I will thank my primary advisor, Professor Sven A. Haugland, and the other two on my dissertation committee, Professor Jørn K. Rognes and Professor Guje Sevon. Regarding the language, Eva Tangen was the one with the red pen and the good advice. This dissertation would never have been written without the openness and the goodwill of the organizations that participated, and particularly the informants I had the pleasant opportunity to talk to. In particular (but in no particular order) Thor Hauge, Sigurd A. Hauge, Dag Schøyen, Jon Jacobsen, Sonja Fiskum, Jørgen Myhrer, but also Bernhard Claudel, Anne R. Larsen, and Beate Storsul. Parts of this report are written in Bodø and Copenhagen. Thanks to those at Siviløkonomutdanningen i Bodø/Høgskolen i Bodø, who provided me with office space to work in on several occasions, and to the Scandinavian Academy of Management in Copenhagen for providing me with an office (with a bed). There is a financial side to (almost) everything, and certainly to this thesis. The following are thanked for their financial support: The Norwegian School of Economics and Business Administration (including their different funds), the Foundation for Research in Economics and Business Administration (and their fund for Applied Research), and finally The Norwegian Research Council. Håvard Ness Hønefoss, March 2001 iii ABSTRACT This thesis aims to explore how long-term interorganizational relationships are managed as they evolve over time. The developmental processes in long-term relationships are not very well understood. However, building on recent ideas found in the literature, a conceptual framework is developed. The framework draws on two traditionally separate streams of research: contract theory and negotiation theory. As long-term relationships typically represent agreements that are incompletely specified (as some or many issues are left for future resolution), the relationships are characterized by a planning gap. Thus, issues occurring as the relationship evolves must be dealt with and settled in order to achieve the intentions in the agreement. Thus, occurring events in the relationship might be viewed as a series of unfolding joint decision episodes. As the parties to an agreement are assumed to have both common and private goals, their motives are mixed. Thus, they have a choice between pursuing own or common goals at each decision point. From contract theory we know that different kinds of governance mechanisms are combined in order to create flexible frameworks that exchange takes place within. However, we know little about how these mechanisms change over time. As contractual mechanisms represent structural conditions, there is a need to address the interaction that take place between agents in order to understand developmental processes. The perspective adopted here contends that joint interaction and decision-making can be viewed as negotiation incidents. As mixed motives are involved, the agents must choose a negotiation strategy that suits their purpose. Thus, the study adopts a view of long-term relationships as continuous negotiated agreements. Based on the ideas developed in the first part of the thesis, a longitudinal study of three evolving interorganizational relationships in the Norwegian retail sector is conducted. The study suggests that the general perspective developed can give valuable insight into interfirm developmental processes. Over extended periods of time the decision points in the cases were tracked in order to study the evolution of governance mechanisms, negotiation strategies, and the outcomes achieved. Thus, the study sheds new light on these important developmental aspects of long-term relationships. Further, the study identified several developmental aspects that the current literature has awarded little attention, such as the interdependencies between structure and action, the evolution of practices, interdependencies between issues, interdependencies between different interaction levels in relationships, evolving states in relationships, emerging change and the impact of observed performance, and impact of personnel turnover. Finally, the study suggests that alliances with different initial conditions and different aims evolve along different, but converging, paths. iv TABLE OF CONTENTS 1: INTRODUCTION AND RESEARCH PROBLEM…………………...………………...1 BACKGROUND.................................................................................................................. 1 THE RESEARCH PROBLEM............................................................................................. 2 POSITIONING THE STUDY .............................................................................................. 4 Current research on developmental processes in IORs ........................................................ 4 Conceptual contributions.................................................................................................. 5 Empirical contributions .................................................................................................... 7 Discussion............................................................................................................................. 9 Agreements, conditions, and contracts ........................................................................... 10 Negotiation ..................................................................................................................... 11 The what, the how, and the why......................................................................................... 12 Research question revisited ............................................................................................ 12 Initial model.................................................................................................................... 13 Expected contribution..................................................................................................... 13 EMPIRICAL ISSUES......................................................................................................... 14 Methodological approach ................................................................................................... 14 Empirical setting................................................................................................................. 15 THE STRUCTURE OF THE THESIS............................................................................... 15 SUMMARY........................................................................................................................ 16 2: PROCESSUAL RESEARCH AND CHALLENGES OF THE STUDY.....................19 INTRODUCTION .............................................................................................................. 19 THE CHARACTERISTICS OF PROCESS THEORY AND THE NATURE OF PROCESSUAL RESEARCH............................................................. 19 Process theory..................................................................................................................... 20 Definition of process .......................................................................................................... 20 Events and incidents ....................................................................................................... 20 Conducting processual research ......................................................................................... 21 Reality "in flight"............................................................................................................ 21 Assumptions ................................................................................................................... 21 Analysis .......................................................................................................................... 22 Interaction, analysis, and levels ...................................................................................... 22 Induction, deduction, and abduction............................................................................... 23 CLARIFYING THE UNDERLYING THEORY OF PROCESS....................................... 24 Linking structure and action: the process of structuration.................................................. 25 Structure - Systems - Structuration................................................................................. 25 Agency and the agent.....................................................................................................