Drivers of Channel Equity: Linking Strategic Marketing Decisions to Market. Performance

Transcription

1 Drivers of Channel Equity: Linking Strategic Marketing Decisions to Market Performance Manisha Mathur Department of Marketing, School of Business Administration University of Mississippi, University, MS 38677, USA Abstract The channel relationships offer strategic value and can provide opportunities to increase firm performance. Marketing strategy based on channel equity provides a new approach in which channel relationships are included in the firm's strategic planning and implementation. A conceptual framework for generating channel equity from the perspective of an individual supplier is proposed. The author proposes five key drivers of channel equity-communication, trust, commitment, dependence, and customer orientation. The paper proposes that relationshipspecific investments will have favorable impact on the drivers of channel equity and would enable the firms to build their channel equity. The favorable impact of relationship-specific investments is proposed to be moderated by relationship phase, and external uncertainty. The article makes an important contribution to marketing theory by examining theoretical perspectives from the field of relationship marketing and strategic management in conjunction to illuminate the value of channel equity in improving firm performance. Keywords: Relationship-Specific Investments, Communication, Trust, Commitment, Dependence, Customer Orientation, Channel Equity, Firm Performance.

2 Introduction The transition of the nature of buyer-seller interactions from the more cautious, arm slength relationships to building close relationships, over the last decade or so (Kalafatis, 2000; Metcalf & Frear, 1993), has shifted the emphasis to relational exchanges based on the perception that there are greater benefits to be obtained through development of close relational bonds. The main precursors of the building of relationship-based channel structures is the growing value of channel intermediaries with their increase in size, enhanced product knowledge, increased technical competence, and specialization (Heide, 1994). The greater focus on relationship development has opened up avenues for quantifying the role of long-term relationships, to exhibit their importance for the firm s bottom line, and to illustrate the significance of the firm s marketing function. Measuring the role of long-term successful relationships to a firm s performance is highly complicated. Nevertheless, there are several ways by which long-term relationships exhibit their impact on a firm s performance through evaluation of customer equity, brand equity, relationship equity, Tobin s Q, and so on. A marketing channel is considered an important asset (Coughlan, Anderson, Stern, & El-Ansary, 2006), and channel relationships signify market-based assets, which represent the relationships between a set of interdependent organizations involved in making products or services available to the end-users (Srivastava, Shervani, & Fahey, 1998). The strategic value of channel relationships is widely accepted (Anderson & Weitz, 1992; Brodie, Glynn, & Durme, 2002; Ganesan, 1994). Although, marketing literature recognizes the role of channel members contribution to the creation of equity (Brodie, et al., 2002), there is a significant lack of understanding about how channel members create equity. The concept of channel equity is significant in the sense that it endows the firms with a way to influence power 1

3 and control within the channels of distribution (Hunt & Nevin, 1974). Also, the profitability of the distribution industry and its vitality can be a great source of competitive advantage (Best, 2009). Moreover, preserving and creating new channel equity is needed to address the increase in the level of consolidation in the distribution channel (Fein & Jap, 1999). With an increase in the concentration of ownership of retail outlets and the increase in their power and control in distribution channels, the accrual of benefits to manufacturers is increasingly getting hard to come by (Aaker, 1991; Shocker, Srivastava & Ruekert, 1994), and manufacturers are getting more dependent on retailers. Effective and efficient marketing management necessitates the building of long-term relationships (Houston & Gassenheimer, 1987) and focuses on those factors that contribute to enhancing the lifetime value of the long-term relationships that will ultimately drive channel equity to positively impact a firm s performance. There is no dearth of research in marketing channels that investigate the importance of channel member relationships, but there is a striking lack of research that investigates the development and management of channel equity as a goal of channel member relationships that provide benefits and enhance firm performance. Also, advancing the notion of linking channel equity to firm performance becomes highly important for marketing executives in demonstrating the strategic value of investments in channel relationships and the importance of channel equity for a firm's performance. Channel equity is a relatively new approach to strategic initiatives in a firm that aims to spotlight those strategies that grow channel equity. While it may seem evident that channel equity contributes to performance, understanding how to grow and manage channel equity is more complex. Indeed, determining the ways to improve channel equity is of utmost importance; and if accomplished well, significant competitive advantage can be created through channel 2

4 equity. Besides the acknowledgement of the potential contribution of channel equity to the firm and showing that channel performance is critical to a firm's success, adequate attention has yet to be accorded to the explication of the channel equity construct and its antecedents. A proper framework of channel equity is highly desirable and critical for a firm s performance. The current research aims to focus on these aspects of channel equity. The research draws from two different theoretical perspectives in the strategy literature and the relationship marketing literature: the resource-based theoretical perspective and the commitment-trust theory of relationship marketing, respectively. The study examines how relationship-specific investments improve communication, trust, commitment, dependence, and customer orientation that drive channel equity. These five factors are critical for driving channel equity, which is a marketing channel s key strategic resource capable of favorably impacting a firm s performance. The article conceptualizes and defines channel equity from an individual supplier s perspective. Channel equity is defined as the extent to which a supplier firm receives a favorable response from a reseller firm for its channel offering. The study examines how channel equity is built from relationship-specific investments through its drivers and how the relationship phase and external uncertainty moderate the effectiveness of such investments. By synthesizing extant knowledge and performing an extensive literature review, valid drivers of channel equity are proposed, and the effect of channel equity is analyzed on firm performance. This research proposes five key drivers of channel equity: communication, trust, commitment, dependence, and customer orientation. Thus, the study endeavors to answer the following research questions: How do supplier firms generate channel equity to improve their firm performance? This research studies the impact of the relationship phase, and external 3

5 uncertainty as two moderating factors. Thus, the other research question the study attempts to answer is: How do the perceived external uncertainty and relationship phase impact the effectiveness of investments in channel relationships? The paper contributes in many ways to the marketing literature. First, prior research is extended to explore and establish the concept of channel equity. The cynosure of the literature on marketing channels has been on the antecedents for thriving channel relationships critical for channel performance, and there is also inconsistent focus on performance measurements in the marketing channel system (Foreman, 2009). This article intends to address the concept of channel equity by utilizing the existing broad-spectrum research on channels. The study determines ways to improve channel equity. Second, the research develops a framework to link channel equity to firm performance, explicitly. The growth and profitability of the wholesale distribution industry opens avenues for firms to link marketing strategies to a higher-level financial metric that is of concern to the CEOs. For that reason, a framework that links the outcome of marketing initiatives such as investments directed at fostering and bolstering channel relationships is proposed. The favorable impact of channel equity on improving firm performance is also demonstrated. Third, the proposed framework would enable the top managers to choose those marketing strategies that enhance a firm's performance through channel equity. Hence, the article's contribution is in explicating and using channel equity to focus marketing strategy. The paper, therefore, provides a deeper understanding of ways to improve channel equity, and will offer strategic insights to marketing executives on optimal channel management and channel strategies, which ultimately, lead to better firm performance. 4

6 Channel Equity, Brand Equity, Customer Equity, and Relationship Equity This paper posits that firms can improve their equity in the channel by maintaining higher levels of communication, trust, commitment, dependence, and customer orientation. The concept of channel equity is considered as a component of marketplace equity, which also includes brand equity and reseller equity (Anderson & Narus, 1999). However, conceptualization of marketplace equity remains underdeveloped in the marketing literature. Srivastava et al. (1998) describe channel equity as a result of partner relationships between a firm and its major channel members. Channel equity is distinct from brand equity. Brand equity reflects bonds between a firm and its customers, while channel equity reflects bonds between a firm and its channels members (Srivastava et al., 1998). Brand equity is the result of extensive advertising and superior product functionality. On the other hand, channel equity results from long-standing and successful business relationships between a firm and its key channel members (Srivastava et al., 1998). Channel equity is based on different attributes than those for brand equity. Brand equity is associated directly with consumer demand; on the other hand, channel equity is associated with derived demand and the processes that supply goods in response to consumer demand (Brodie et al., 2002). Thus, features of inter-organizational relationships, such as experience and knowledge, play key roles in conceptualizing channel equity. Besides the conceptualization of channel equity, empirical findings regarding channel equity have demonstrated that long-term inter-firm relationships increase return on investments (Kalwani & Narayandas, 1995). The importance of creating and driving channel equity is partially due to the challenge involved in designing the right channel and its proper implementation. Designing a marketing channel requires marketing activities, including 5

7 segmenting the market, selecting target segments, and providing the most efficient service outputs for the intended end-users; and the implementation process requires firms to have an understanding of the interplay of power, dependency, conflict, and coordination for its efficient execution (Coughlan et al., 2006). Channel equity is the extent to which a supplier firm receives a favorable response for its channel offering from a reseller firm. Channel equity is the outcome of partner relationships between a firm and its channel members (Srivastava et al., 1998) and represents the amount of positive effect a particular channel or channel member will have on customer response to a particular product (Kumar, Bohling, & Ladda, 2003). It enables firms to focus their efforts on enhancing their value by increasing channel equity. The current strategic framework attempts to reveal the ways to increase channel equity, enhancing the ability of firms to focus on their critical strengths and hidden vulnerabilities. On the other hand, customer equity is the value of a firm s customers, and brand equity is the value of a firm s brands. Customer equity is defined as the total of the discounted lifetime values of all of its customers (Rust, Zeithaml, & Lemon, 2000). Customer equity views profits as coming from customers rather than products. Another related concept of relationship equity is defined as the tendency of the customer to stick with the brand, above and beyond the customer s objective and subjective assessments of the brand (Lemon, Rust, & Zeithaml, 2001). Defined from the perspective of a customer, customer-based brand equity is the differential impact of brand knowledge on consumer response to the marketing of the brand (Keller, 1993). Brand equity represents the incremental discounted future cash flows that a firm obtains from a product with a brand name in comparison to the cash flows that a firm obtains if the same product did not have that brand name (Simon & Sullivan, 1990). The marketplace is highly 6

8 competitive, and demand from consumers is flattening; therefore, firms seek ways to improve the efficiency of their marketing expenses. Brand equity reflects the bond between a firm and its customers (Srivastava et al., 1998). Brand equity reflects a firm s ability to advertise successfully and suggests that the product is highly functional (Srivastava et. al., 1998). Channel equity exemplifies the value of an asset for enhancing marketing productivity through the positive effect created for the channel member in the minds of the consumers. The best examples are online Internet channels such as IBM, Amazon, and e-bay. These channels have made the Internet purchase so easy that many customers just buy from these channels irrespective of the price levels (Kumar et al., 2003). Channel equity represents the asset value of the marketing investments made in building channel relationships and captures the provided past, present and expected future values (Anderson & Narus, 1999). Brand Equity (Rust, Zeithaml, and Lemon 2000) Customer Equity (Rust, Zeithaml, and Lemon 2000) Long-Term Trends Relationship Equity (Lemon, Rust, and Zeithaml 2001) Channel Equity Product Focus Customer Focus Focus on Channel Focus Relationships w.r.t. Brands Attracting Customers Retaining Customers Retaining Customers Attracting and Retaining Resellers Transactions Relationships Relationships Value to Channel Members Goods Services Services Flow of Goods and Services Old Economy New Economy New Economy Attention Age 7

9 Theoretical Background Theoretical Background and Propositions Drawing from theoretical perspectives of relationship marketing literature (commitment-trust theory), and strategy literature (resource-based view), this research examines how firms develop channel equity, which is leveraged to improve firm performance. The commitment-trust theoretical perspective (Morgan & Hunt, 1994) envisions that firms can be successful in establishing, developing and sustaining relationships when they achieve commitment and trust in relationships. Morgan and Hunt (1994) theorize that the presence of relationship commitment and trust is key to successful relationship marketing. Relationship marketing is defined as the act of establishing, developing, and maintaining successful relational exchanges (Morgan & Hunt, 1994). Commitment and trust are critical for developing relationships because they encourage marketers to make an effort to protect and safe-guard their relationship investments by cooperating with their exchange partners. According to Morgan and Hunt (1994), relationship commitment reflects the belief of the exchange partner about the importance of the relationship, warranting the greatest level of effort to maintain the relationship that is valuable to the exchange partner. Commitment-trust theory suggests that relationship commitment and trust encourage marketers to view potentially high-risk actions as prudent because of the belief that the exchange partner might not behave opportunistically (Morgan & Hunt, 1994). By focusing on commitment and trust, firms are better able to curb their temptation for attractive short-term alternatives in favor of the anticipatory long-term gains of continuing their relationship with existing partners. Moreover, focusing on commitment and trust enables firms to regard possibly high-risk activities of the firm as wise because the firms invest in relationships to 8

10 gain the commitment and trust from their partners that help to mitigate the potential risk of them behaving opportunistically. Consequently, Morgan and Hunt (1994) assert that both commitment and trust must be present to foster a firm s efficiency, productivity, and effectiveness. In a nutshell, cooperative behaviors are strengthened directly by commitment and trust, which are favorable to the success of relationship marketing. Morgan and Hunt (1994) define relationship marketing as representative of all those marketing actions which emphasize establishing, developing, and maintaining successful relational exchanges. According to Morgan and Hunt (1994), relationship commitment and trust are the key constructs that are the mediating variables between five antecedents and five outcomes. The five antecedents are relationship termination costs, relationship benefits, shared values, communication, and opportunistic behavior; and the five outcomes are acquiescence, propensity to leave, cooperation, functional conflict, and decision-making uncertainty (Morgan & Hunt, 1994). The author posits that the relational exchange partnerships involving manufacturers and their channel intermediaries must cooperate, and cooperative behaviors are promoted when firms attention is directed at expending developing channel relationships. The relational exchanges such as just-in-time procurement and total quality management require investments that promote partnering based on commitment and trust. Such relational exchanges promote efficiency and productivity of the firms. Drawing from the theoretical perspectives in the strategy literature, the resource-based view (RBV), this study examines how firms can achieve improvement in firm performance by leveraging investments in channel relationships through the development of the channel equity. The resource-based view of the firm is a well-established theoretical framework for anchoring the impact of firm specific resources on firm performance. Based on the notion that firms are 9

11 comprised of bundles of resources and that those resources exhibit heterogeneity across firms that persist over time (Barney, 1991; Peteraf, 1993; Wernerfelt 1984), firms possess resources that are valuable, rare, inimitable, and nonsubstitutable. According to the resource-based view, firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm (Barney, 1991). Firm resources enable the firms to conceive and implement strategies which are not easily duplicated by competing firms; as a result, firms are able to achieve and sustain their competitive advantages and are able to improve their efficiency and effectiveness (Daft, 1983). Resources are considered to be valuable if they enable firms to exploit opportunities, and neutralize threats in their environments (Barney, 1991; Wernerfelt, 1984). Rare resources enable firms to implement value-creating strategies that are not simultaneously being executed by other firms. Firm resources must be inimitable to contribute to value generation such that it is not possible for firms who do not possess those resources to obtain them (Amit & Shoemaker, 1991; Barney, 1991). Furthermore, the resource-based perspective suggests that a resource must also satisfy the criterion of nonsubstitutability, which suggests that there must be no strategically equivalent resources, as they can be exploited by competing firms to separately implement the same strategies (Amit & Shoemaker, 1991; Perteraf, 1993). Firms can obtain competitive advantage by executing novel value-creating strategies, which are not readily matched by other firms (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984, 1995). When firms develop complementarities among resources and their embedded processes, their potential to be successful in the marketplace is greatly enhanced (Collis and Montgomery 1995). Srivastava, Shervani, and Fahey (1998) describe market-based assets as those assets that develop when firms commingle with entities in the external environment. The market-based 10

12 assets include a firm s relationships with its customers, channels, and partners (Srivastava et al., 1998). Thus, channel relationships are regarded as intangible market-based assets (Srivastava et al., 1998) that are key to developing channel equity in order to achieve a sustainable competitive advantage and improve firm performance. Market-based assets are known to improve shareholder value by enabling firms to accelerate and increase cash flows, decrease volatility and vulnerability of cash flows, and enhance the residual value of cash flows. There are two types of market-based assets: relational and intellectual, which are intangible and external to the firm (Srivastava et al., 1998). Relational market-based assets are outcomes of the relationship between a firm and key external stakeholder. For example, channel equity reflects the bond constituting the relationship between a firm and its key channels (Srivastava et al., 1998). Relationship-specific investments and Drivers of Channel Equity With the growing realization of the importance of building close long-term relationships (Kalafatis, 2000), there has been an increased emphasis on developing new strategic partnerships requiring substantial investments from participants (Kalafatis, 2000). In order to efficiently and effectively reach their customers and maintain attractiveness of their products, manufacturing firms need to manage the behaviors of their channel partners zealously (Coughlan et al., 2006). For example, the biggest impetus for a ballet show s success is the number of shows performed consecutively upon its debut. Hence, it is in the interest of the ballet s producer to be cognizant of how theatres decide to select shows and how many times they stage them. Relationshipspecific investments are an exchange partner s idiosyncratic investments focused on developing and maintaining a relationship and are not easily recoverable (Ganesan, 1994). 11

13 Any channel system requires the desire or willingness of the parties involved to forge long-term relationships to obtain benefits, which improve their firms' performances. Relationship-specific investments enable firms to be equipped with specific assets such as custom-built physical facilities (Shervani et al., 2007), which support idiosyncratic transactions between a firm and its key channel partners. This facilitates the building of their long-term relations as specific assets cannot be reused for another relationship without their substantial loss in value. The investments are committed for building idiosyncratic relationships, ultimately leading to improvements in dependence, satisfaction, communication, and customer orientation. The decisions involving relationship-specific investments are fraught with significant opportunity costs and uncertainty because such investments are substantial (Shervani et al., 2007), and the constructive influence of such investments on a firm's performance is also not apparent in the short-run. The drivers of channel equity play a key role in building and promoting the long-term orientation of the firms in a relationship. Firms invest in channel relationships in an effort to become a business entity of choice for the other business entities and seek to build relationships, in order to push the product they are endorsing in the marketing channel. When firms invest in building relationships with key channel members, they signal expectations of reciprocation. For example, when a company builds its plant very close to another company so that both the companies save on the transportation cost of the materials to each other, it signals that the first company is investing in a relationship-specific exchange. Other examples include when a company builds customized warehouses or customized delivery vehicles which support establishing and maintaining a relationship between two partners. 12

14 When a firm (such as a supplier) becomes a choice partner with another channel member, this fosters the building of a long-term relationship. As a consequence, the firm is able to obtain critical information from its partner, which enables the firm to efficiently and effectively manage existing and new products, which in turn enables the firm to realize the value of investment it made on building the relationship with the channel member. As a result, equity in the channel is created. Channel equity represents the amount of positive effect the firm has on the response of another channel member downstream. This enables the firm to push its product further down the channel so that it ultimately reaches the end-user. With relationship-specific investments, firms are able to improve communication, trust and commitment with their partner firms. Also, relationship-specific investments offer evidence to the partner firms about the seller firm s dependence and its greater level of customer orientation. Relationship-specific investments are specifically associated with adaptations of products and production processes, delivery procedures, quality systems, social codes, and most important of all, trust creation (Sanzo, Santos, Vazquez, & Alvarez, 2003). Thus, when firms invest in relationship-specific investments, they are able to develop relations with another channel member that is based on trust (Morgan & Hunt, 1994). Customer firms trust sellers who make RSIs (Palmatier, Dant, & Grewal, 2007). A greater level of communication is required to adapt and offer offerings expected by a customer firm. Thus, communication is improved with investments in channel relationships as information sharing provides value to each partner, and it is difficult to replace this value (Palmatier et al., 2007). Furthermore, communication between partners enables the supplier firm to develop an atmosphere of mutual support and participative decision making (Mohr & Nevin, 1990; Palmatier et al., 2007). 13

15 Seller RSIs improve commitment between the partners (Palmatier et al., 2007). Both commitment and trust are critical for understanding inter-organizational relationships (Morgan & Hunt, 1994), which are necessary for building strong relationships. Seller firms RSIs positively influence the seller s commitment to a buyer firm as RSIs increase switching costs for the seller firm, and indicate the importance of the buyer firm to the seller and provides assurance to the buyer firm that the seller firm would not act opportunistically (Anderson & Weitz, 1992; Morgan & Hunt, 1994; Palmatier et al., 2007). Seller RSIs offer tangible evidence that the seller is trustworthy and committed to the relationship with the buyer firm (Palmatier et al., 2007). As sellers commit RSIs they grow more dependent (Palmatier et al., 2007). Seller RSIs signal their need to maintain a relationship to achieve goals (Ganesan, 1994; Kim & Frazier 1997), and provides evidence to the buyer firm that the seller firm is a safe partner. Customer orientation is considered as the focus of the suppliers performance creation functions and performance utilization functions so that the competitiveness of the supplier will be strengthened and individual needs and wants of customers will be satisfied. Performance creation functions refer to a company s abilities and activities to produce customer oriented outputs, whereas performance utilization functions include all abilities and activities related to the customer s use of the supplier s output (Walter, 1999, p. 538). By improving customer orientation, firms are better able to adapt their products, processes, and services to the quality requirements of their customer firms and are better able to develop flexibility towards the customer firm (Walter, 1999). With RSIs, sellers are able to focus on understanding the buyer s entire value chain through which the seller firm is better able to offer benefits to the buyer relative to the buyer s costs and is better able to reduce the buyer s costs relative to the buyer s benefits (Narver & Slater, 1990). 14

16 The substantive investments in relationships involve the use of extensive qualification programs by the participants to become preferred or certified customers (Kalwani & Narayandas, 1995), which lead to improvement in communication, trust, and commitment between partners. Relationship-specific investments promote relationship-specific goals that benefit channel participants, thus strengthening specific symbiotic channel relationships sustained through investments in relationship-specific assets (Anderson & Narus, 1990), and thus improving interfirm customer orientation. When firms invest in relationship-specific assets, expectations of dependence and continuity are shown, and their enthusiasm and dedication to relational orientation is exhibited. Investments in building and preserving channel relationships lead to greater information-sharing and coordination benefitting the channel partners, which results in strong channel relationships. Consequently, investing in forging channel relationships will improve the drivers of channel equity. The author, therefore, proposes that relationship-specific investments are positively related to the drivers of channel equity. Moderating Role of External Uncertainty External uncertainty attenuates the information processing capacity of decision makers because of their bounded rationality (Rindfleisch & Heide, 1997). Top managers may be clueless about the actions which consumers might undertake, or they may be uncertain about the likelihood of occurrence of changes in the sociocultural trends, demographic shifts, etc. (Milliken, 1987). External uncertainty manifests those forces in the environment over which the firms have no control, but which greatly affect firm performance. 15

17 Under conditions of external uncertainty, firms are challenged by idiosyncratic demands (Grewal & Tansuhaj, 2001) of the customers, thus both the channel partners can be effective and efficient in meeting their desired goals when they communicate, trust, and commit to each other, and are dependent on each other. Relationship-specific investments entail switching costs and are not easily redeployed to other relationships without incurring significant losses (Shervani et al., 2007). Firms can efficiently and effectively allocate relationship-specific investments by focusing on improving their communication, trust, and commitment and encouraging dependence of the distributor or buyer firms and implementing strategies that promote them. This would enable the seller firm or the manufacturer to improve marketing flow toward the enduser by creating a demand from the buyer firm. Manufacturing firms need to minimize their risks and optimize their resources by improving the drivers of channel equity in an industrial environment characterized by external uncertainty. Hence, manufacturing firms need to improve their communication with key channel partners in order to reduce ambiguity and deal with external uncertainty. The author, therefore, proposes that the greater the external uncertainty, the stronger the positive association between relationship-specific investments and communication between the channel partners. External uncertainty represents a dynamic industry environment, which is difficult to comprehend (Shervani, Frazier, & Challagalla, 2007). The bounded rationality of managers impedes their ability to predict and prepare for any eventuality in situations of high external uncertainty. Furthermore, an externally uncertain environment permits the development of negative information asymmetries and allows intermediaries to act opportunistically (Shervani et al., 2007). Thus, under conditions of external uncertainty, firms are not able to effectively 16

18 assimilate information (Grewal & Tansuhaj, 2001), the quality of information is jeopardized, and firms find it difficult to effectively allocate their resources. Strategic planning of the firms is adversely impacted when firms face greater levels of uncertainty (Grewal & Tansuhaj, 2001). External uncertain industrial environments create the potential for opportunistic behavior of channel intermediaries (Shervani et al., 2007), and opportunistic behavior reduces trust and commitment (Morgan & Hunt, 1994). Dependence is said to differ directly with the value received from a partner and inversely with the availability of alternative trading partners (Morgan & Hunt, 1994); however, external uncertainty makes it difficult for manufacturers to adequately envisage the imminent actions of their key competitors (Milliken, 1987; Grewal & Tanasuhaj, 2001; Grewal et al., 2010). Furthermore, given bounded rationality, manufacturing firms are not able to modify their agreements to change circumstances causing adaptation problem (Rindfleisch & Heide, 1997) and maintain partnerships with their intermediaries. Thus, the author suggests that the greater the external uncertainty, the weaker the positive association between relationship-specific investments and trust, commitment, and dependence between channel partners. Moderating Role of Relationship Phase According to Dwyer, Schurr, & Oh (1987), relationships between buyers and sellers develop through five phases demarcated as awareness, exploration, expansion, commitment, and dissolution. Each phase characterizes a major transition in how exchange partners regard each other (Dwyer, Schurr, & Oh, 1987). Jap and Ganesan (2000) regard the life cycle of a relationship in a marketing channel system in terms of exploration, buildup, maturity, and 17

19 decline. However, the focus of the present research is on three distinct phases of a relationship because of their relevance with the study: exploration, maturity, and decline. During the exploration phase of relationship development, the potential partners evaluate obligations, benefits, and encumbrances entailed in continuing an exchange relationship. The exploratory relationship may be very short-lived or may comprise a prolonged period of trial and appraisal; however a relationship during this phase is very fragile and may terminate quite easily as it involves minimal investment and minimal interdependence in bilateral exchange. During this phase, trial purchases may occur, both a firm and its customers may test each other s integrity, compatibility, and performance (Dwyer, Schurr, & Oh, 1987). Furthermore, in the exploration phase, there is a lot of ambiguity regarding the future value of the relationship as the relationship lacks trust, and focus is on individual outcomes (Jap & Ganesan, 2000). There is a lack of adequate information and interaction between the parties. Consequently, relationship-specific investments and perceptions of the importance of the product would not be effective in enabling and developing effective communication, trust, commitment and dependence between the two parties during the exploratory phase of a relationship. Thus, it becomes apparent that the exploration phase of a relationship will attenuate the positive association between relationship-specific investments and drivers of channel equity. The maturity phase of a relationship characterizes that stage in the evolution of a relationship where both the seller and the buyer agree to maintain the relationship on a regular basis either tacitly or explicitly (Jap & Ganesan, 2000). The maturity phase of relationship is marked by the deepening of satisfaction and interdependence supported by significant and consistent inputs, and both the buyer and the seller make an attempt to resolve any conflict and make adjustments in their relationship. During the maturity phase of relationship evolution, 18

20 customers are able to evaluate a firm s offerings over a period of time, and firms are able to discern their customer s current and potential needs and preferences by discovering hidden patterns (Mithas et al., 2005). Norms (expected patterns of behavior) are well developed and implemented during the maturity phase of a relationship (Dwyer, Schurr, & Oh, 1987), and relational norms promote behaviors that focus on relational continuity and developing long-term relationships (Jap & Ganesan, 2000). As a result, firms are better able to improve the drivers of channel equity through relationship-specific investments. The perceptions of product importance create a need for communication for the channel intermediaries (Metcalf & Frear, 1992, 1993; Kalafatis, 2000), and this is further strengthened by a mature relationship between the two parties (Jap & Ganesan, 2000). Accordingly, the author proposes that the maturity phase of relationship will strengthen the positive association between relationship-specific investments and drivers of channel equity. During the decline phase of the relationship development, dissolution of the relationship may be initiated unilaterally by a partner, who is not satisfied, by exploring alternative relationships and by informing the other partner about the intent to terminate the relationship (Dwyer, Shurr, & Oh, 1987; Jap & Ganesan, 2000). Furthermore, in the decline phase, relationships lack trust, and the focus is on individual outcomes (Jap & Ganesan, 2000). During the decline phase of the relationship, when there is a high level of customer dissatisfaction and the lack of trust, the efforts of the firms in improving the drivers of channel equity will not pay off, and marketing resources may be wasted on those customers that would ultimately leave. Furthermore, due to significant levels of customer dissatisfaction and trust, firms may not be able to maintain or gain trust, commitment, or dependence, and quality of 19

21 communication may be adversely impacted. Thus, the author proposes that the decline phase of a relationship will attenuate the positive association between relationship-specific investments and drivers of channel equity. Drivers of Channel Equity Communication Communication is a key component for successful distribution channels (Mohr & Spekman, 1994) and reflects the extent to which trade partners in a dyad are involved actively in exchanging and sharing information with each other (Anderson & Narus, 1990; Anderson &Weitz, 1992). Communication must be achieved in a marketing channel system to reduce information asymmetry as information is the key that can open all sales channels (Schmitz & Wagner, 2007). Complete and timely information is desired among channel members to act as a catalyst for fostering associations and long-term relationships which drive channel equity. It is established in the marketing literature that communications that are timely and reliable foster trust and commitment in organizational and channel settings (Anderson & Narus, 1990; Ganesan, 1993; Mohr & Nevin, 1990; Morgan & Hunt, 1994; Srivastava & Chakravarti, 2009). In channel negotiation research, a communication strategy assumes a significant priority in circumstances of unstable information asymmetry (Srivastava & Chakravarti, 2009). Communication amplifies the satisfaction and cooperation among partnerships in a marketing channel system (Mangin et al., 2008). Also, communication positively influences cooperation and coordination among channel members (Anderson & Narus, 1990) and enhances participation to set and accomplish goals as participation fosters goal internalization (Anderson, Lodish, & Weitz, 1987). 20

22 Communication can greatly improve outcomes in situations of limited opportunities (Srivastava & Chakravarti, 2009) and is a dimension of satisfaction (Schmitz & Wagner, 2007). Consequently, the more channel members communicate with each other, the higher the trust will exist between them (Butler & Cantrell 1984, Li 1998)), which greatly impacts coordination, satisfaction and commitment in a channel member relationship (Mohr, Fisher, & Nevin, 1996). Mutual communication, which is candid and is detailed, facilitates an active give and take of ideas required for a healthy channel partnership (Coughlan et al., 2006). Channel relationships that are old and stable may experience a decline in communication as they think they know each other well and consider communication to be superfluous to their relationship; however, lack of communication ultimately makes a dent in the relationship by affecting trust (Coughlan et al., 2006). Indeed, the way channel members communicate among themselves potentially determines the quality of their relationships, and communication that is effective, timely, and frequent with efficient information systems in place constitutes an essential ingredient for forging long-term relationships among channel members. Hence, communication will drive channel equity. Trust Trust exists when one partner exhibits confidence in an exchange partner s reliability and integrity (Morgan & Hunt, 1994). According to Moorman, Deshpande, & Zaltman (1993), trust refers to the willingness of one partner to rely on its exchange partner. Earlier research by Rotter (1967) regards trust as a generalized expectancy held by a partner to rely on another partner s word. The conceptualizations on trust emphasize the importance of confidence (Morgan & Hunt, 1994). 21

23 The central role of trust has been emphasized in literature. Trust involves believing that a channel partner is honest, reliable, and sincere, will keep promises and fulfill obligations (Anderson & Narus, 1990; Dwyer & Oh, 1987; Duarte & Davis, 2004). Further, trust encompasses the belief of a channel member in its partner's benevolence, which includes genuine concern for a partner's welfare, motivation to look for mutual gains, and the shunning of unforeseeable behaviors which could lead to negative outcomes for the firm (Anderson & Narus, 1990; Geyskens et al., 1998). Therefore, members involved in a trusting relationship can aspire to retain and sustain the relationship (Granovetter, 1985). One partner may be confident about another partner s reliability and integrity because of the belief that the other partner is consistent, competent, honest, fair, responsible, helpful, and benevolent (Morgan & Hunt, 1994). Trust has been shown to decrease uncertainty for a relatively dependent channel member, whose trust in its partner is based on the cooperative and sincere intentions of its partner (Geyskens & Steenkamp, 1995). It has been suggested that trust has a positive impact on satisfaction and cooperation while attenuating the impact of channel conflict (Geyskens & Steenkamp, 1995). Also, partners desire to commit themselves to relationships that are characterized by trust (Morgan & Hunt, 1994). Firms seek trustworthy partners because commitment signifies vulnerability of a firm (Morgan & Hunt, 1994). When trust exists among channel members, they feel safe because of belief in the genuine intentions of their partners (Geyskens & Steenkamp, 1995); they will be involved in activities that will advance positive results (Geyskens et al., 1998), leading to a higher level of satisfaction with channel relationships (Andaleeb, 1996). Trust has been considered to be the most important aspect in interfirm dynamism (Han, Wilson, & Dant, 1993). 22

24 It has been reported that trust decreases transaction costs and promotes exchange between firms (Cummings & Bromiley, 1996; Zaheer, McEvily, & Perrone, 1998). A higher degree of trust engages cooperative intentions (Dirks & Ferrin, 2001; Ferrin & Dirks, 2003). Trust encourages the long-term notion of relationship costs and gains and lessens the apprehension of facing opportunistic behavior (Ganesan, 1993; John, 1984; Morgan & Hunt, 1994). Spekman (1988) emphasizes the importance of trust in a relationship and suggests that it is the cornerstone of a strategic partnership. There is an ongoing evaluation of the trustworthiness of partners (Srivastava & Chakravarti, 2009), and trust emboldens channel member partnerships as it is known to build reputation and transmit expectations, which instill willingness in partners to keep relationships alive. Thus, it becomes evident that trust in a marketing channel system drives channel equity. Commitment Commitment is defined as the enduring desire to maintain a relationship which is valuable (Moorman, Zaltman, & Deshpande, 1992; Morgan & Hunt 1994). When an exchange partner believes that its existing relationship with its partner is worth enduring indefinitely, the exchange partner ensures that their relationship is maintained on a long-term basis (Morgan & Hunt, 1994). Commitment is considered an integral component for encouraging cooperation between independent channel members, which improves mutual profitability (Anderson & Weitz, 1992). It decreased the inclination of distributors to promote competitive brands (Andaleeb, 1996). Commitment reflects the desire to maintain a valued relationship (Andaleeb, 1996), as anticipating permanence and cementing of relationships is a critical characteristic of commitment. 23

25 Prior conceptualizations of commitment have been found in social exchange, marriage, and organizations (Morgan & Hunt, 1994). Commitment entails confidence in the future and a willingness to invest in a partner at the cost of other available opportunities in an endeavor to maintain and grow a relationship (Coughlan et al., 2006). Relationship commitment exists only when the relationship is considered important to the supplier firm (Morgan & Hunt, 1994). Also, firms will most likely act positively toward committed sellers, and will also act in the best interest of a firm is committed to a relationship (Anderson & Weitz, 1992). In order to achieve valuable outcomes, commitment is crucial among exchange partners, thus firms make an effort to maintain commitment in their relationships (Moorman et al., 1992; Morgan & Hunt, 1994). A firm committed to a relationship views its association with its partner firm as a longterm alliance (Coughlan, Anderson, Stern, & El-Ansary, 2006). Indeed, Berry and Parasuraman (1991) state that relationships are built on the foundations of mutual commitment. A committed partner expects to be doing business with its partner for a long time, makes an effort to resolve any problems and misunderstandings, and is willing to expend long-term investments in growing the relationship with the partner (Coughlan et al., 2006). Consequently, trust and commitment are indispensable to fostering the formation and retention of long-term channel relationships (Duarte & Davies, 2004; Geyskens et al., 1998, 1999), which will drive channel equity. Thus, the author suggests that commitment in a marketing channel system drives channel equity. Dependence Dependence is the degree to which a focal firm requires the resources provided by a source firm to accomplish its objectives, and dependence greatly impacts the channel dynamics (Payan & McFarland, 2005). When exchange partners commit relationship-specific investments, 24

26 they become more dependent on each other and their switching costs become more credible (Ganesan, 1994; Kim & Frazier, 1997). According to Palmatier, Dant & Grewal (2007), potential partners may behave opportunistically; thus firms must expend effort and search costs to find safe partners. Dependence is essential to explicate channel sentiments and actions based on different attributes, such as types of influence strategies, symmetry of dependence, and so on. (Andaleeb, 1996; Geyskens, Steenkamp, & Kumar, 1999; Payan & McFarland, 2005). Dependent relationships are built when a firm believes that the other firm will behave in a way that will result in beneficial outcomes, such as guarantee of product delivery when needed by the firm and cutbacks in monitoring costs (Payan & McFarland, 2005). In a dependent channel relationship, each partner performs the assigned tasks which aid the efficient movement and exchange of product in the marketing channel, enhancing performance and leading to improved economic gains for the participants (Lewis & Lambert, 2001). Business relationships among channel members are built as one firm needs another firm to accomplish the desired aspirations of market expansion and profits, which leads to interdependence between firms (Andaleeb, 1996). According to Kim and Frazier (1997), relationship-specific investments increase the dependence of a firm, resulting in power imbalance. The relationship benefits and relationship termination costs lead to feelings of dependence (Morgan & Hunt, 1994). When dependence of a firm on a source firm is high, then the need to maintain the relationship order to achieve the desired goals is also high. Interdependence among channel partners supports survival and sustenance of channel relationships, which in turn stimulates an increase in channel equity. It, therefore, follows that dependence in a marketing channel system drives channel equity. 25

27 Customer Orientation Customer orientation includes all of the activities involved in sufficiently understanding the target buyers to be able to consistently create superior value for them (Narver & Slater 1990). Acquiring information and disseminating it throughout the organization are important for understanding the buyers in the target market. For a seller firm to be customer orientated, it must continue to understand a buyer s entire value chain (Day & Wensley, 1988). A seller can create value for a buyer in two different ways. A seller can provide benefits to the buyer that exceeds buyer s costs, or the seller can reduce the buyer s costs in contrast to the buyer s benefits. Thus, a seller must understand the target buyer s internal and market dynamics and the cost and revenue dynamics faced by the buyer s buyers, from whose demand the demand in the immediate market is derived (Narver & Slater, 1990). A seller who understands the economic and political constraints in the channel is customer oriented in a better way. The relationshipspecific investments enable firms to focus on understanding target buyers needs to be able to deliver superior value. Behaviorally, firms in competitor-dominated alliances with weak relational ties with their collaborators reveal a greater decrease in customer orientation compared with firms with strong ties with their collaborators (Rindfleisch & Moorman, 2003). The firms in a channel are from different industries and are at different points in the value chain, thus having low levels of knowledge overlap (Rindfleisch & Moorman, 2003), requiring the knowledge of an entire value chain to access customer information. Relationship-specific investments enable firms to improve relationships with channel members that interact more directly with customers (Rindfleisch & Moorman, 2003), thus, increasing the benefit of using such customer information in their offerings. The buyer-seller relationship improves the seller firm s ability to invest in and 26