Mrinal Ghosh

Governance value analysis and marketing strategy

The authors extend transaction cost analysis into a governance value analysis (GVA) framework to address marketing strategy decisions, especially with regard to strategies grounded in cooperative r...

Strategic fit in industrial alliances: An empirical test of governance value analysis

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

Customizing Complex Products: When Should the Vendor Take Control?

Casual observation suggests that firms use contrasting practices and procedures when offering customized products to individual customers. Some firms take a “hands-off” approach and let customers self-select their desired product. In contrast, other firms are proactively involved in designing customized solutions to individual customer needs. The authors call the former “low vendor customization control” and the latter “high vendor customization control.” Despite the strategic importance of customization, no research has shed light on the rationale for using these contrasting approaches to customization and their normative consequences. The authors develop a conceptual model that contends that the appropriate level of vendor control over the customization decision is a function of technology and knowledge considerations. They use data on 304 procurement arrangements for customized products to test their hypotheses and to explore the normative ramifications for three key measures of performance: closeness of the delivered product to customer needs, delivery performance, and the vendors operating profits. The results show that contracting parties choose the level of vendor control over customization in a strategic and discriminating way to enhance the benefits from customization for both parties. The authors discuss implications for both theory and practice.

The Incentive and Selection Roles of Sales Force Compensation Contracts

Designing compensation plans with an appropriate level of incentives is a key decision faced by managers of direct sales forces. The authors use data on individual salesperson compensation contracts to show that firms design their pay plans to both discriminatingly select (i.e., attract and retain) salespeople and provide them with the right level of incentives. Consistent with standard agency arguments, the authors find that firms use higher-powered incentives as the importance of agent effort increases. At the same time, the authors find strong support for the selection role of these contracts. Specifically, agents with greater selling ability and lower risk aversion are associated with jobs offering higher-powered incentives. Finally, consistent with prior findings on incentive contracts, the authors find no support for the insurance implication of the typical agency model. The authors rule out alternative explanations for this anomalous result and find that the selection role of contracts best explains the result in their context.

Durability Versus Concentration as an Explanation for Price Inflexibility

We document the extent of price rigidity across United States manufacturing industries in the 1980s and early 1990s and compare rigidity across different phases of the business cycle. We measure price rigidity in three ways – each under four different sets of assumptions. We take an approach that relies on disaggregated data; we look at price patterns for over 4000 individual manufactured commodities. Both durability and seller concentration are found to be important factors explaining differences in price rigidity across industrial product classes. Using our data, we replicate the regression results found in Carlton (1986) that were based on actual transaction prices from the 1960s.

Pricing behavior in United States manufacturing industries: A statistical study using disaggregated data

We investigate the relationship between industrial market structure and price flexibility (the administered-pricing hypothesis) across United States manufacturing industries by embedding market-structure variables in a model relating relative price variability (dispersion) and inflation. While we find support for a positive relationship between variability and inflation, we do not find that high seller concentration lessens the impact of inflation on price variability. We do find that the larger the efficient-sized plant, the lower the impact of inflation on variability. We also find strong effects of input prices and degree of product durability on relative price variability.

Product Distribution Choices in China: A Transaction Cost Perspective

The emergence of transitional economies (TEs) poses a great challenge to marketing scholars and practitioners alike. China provides a good illustration of the unique problems encountered in TEs. From 1991 to 1994 it boasted an average annual economic growth rate of 11.7 percent (Luk, Xu and Ye 1998) and an annual income growth rate of about 10 percent (Batra 1997). Reforms have dramatically altered the structure of its distribution system from a centralized, state-owned system where prices were fixed and retailers had to purchase their “quota” only from particular wholesalers, to a partially decentralized state and privately-owned system where parties are free to choose their own vendors and retailers. This rapid growth and enormous potential accompanied by reforms have made China an attractive market for foreign investors. For example, in 1993, foreign direct investments in Mainland China amounted to US

Robustness of the relationship between price variability and inflation for US manufacturing

26 billion (Tseng, Kwan and Cheung 1995).

'Strategizing Calculus' in Industrial Procurement Contracts: Safeguarding Pre-Existing Resources versus Creating Value

We study the relationship between relative price variability and inflation in two different ways. We first look at product-class census unit values for five time periods between 1958 and 1982, and find evidence of a positive relationship between variability and inflation. Then we directly update the Vining and Elwertowski (1976) study for the period 1974-91, using individual commodity series from the Bureau of Labor Statistics. We conclude by discussing differences across industries in price stickiness.

Contract Specificity and its Performance Implications

Research on collaborative ties in business markets has pre-dominantly studied how governance forms balance potential gains and transaction hazards within the relationship. Using an incomplete contracting approach, we examine how the OEM trades off gains obtained within the relationship with its supplier against protection of resources that were developed outside such relationship. Adapting the recent theoretical model by Zanarone, Lo, and Madsen (2016) to the context of industrial markets, we hypothesize that OEMs with more valuable pre-existing resources choose closed-price contracts over open-price contracts to dis-incentivize suppliers from overinvesting in capabilities that may enable them to appropriate those resources. Consistent with this model, but not with alternative governance theories, our data on component procurement contracts show that: (1) OEMs tend to use closed-price contracts when their pre-existing resources are more valuable, and the use of closed-price contracts reduces both, (2) the supplier’s dedicated investment and, (3) its value-add to the OEM’s end product. Our work provides evidence on how parties, cognizant of the “dark side�? of entering inter-firm collaborations, strategically balance the conflicting goals of safeguarding pre-existing resources and creating value.