When faced with competitive and commoditization threats, many business-to-business companies increase the service component of their offerings, such that they integrate product and service content to satisfy customer needs—an offering commonly referred to as a solution. Anecdotal evidence notes famous solution successes (e.g., IBM, Rolls Royce), along with comparably unsuccessful examples (e.g., Xerox, Siemens). With its inherent service shift, solution development exposes solution actors to evolving tensions (such as the potential for opportunistic behavior by one of the actors) that, if not addressed properly, reduce their willingness to engage in value-creation initiatives. For instance, to achieve the full potential of a solution, customers must share key resources with the supplier and the supplier must take responsibility for tasks that the customer previously performed. But under such circumstances, how can actors avoid opportunism threats that emerge from responsibility sharing? And how can they prevent information leakage during the exchange of critical resources?
A new study in the Journal of Marketing explores a previously overlooked issue: How can solution actors succeed in governance matching that implements appropriate mechanisms to avoid or address the tensions that emerge in solution development? In this research, our team systematically identifies various governance tensions associated with solution development and how actors might match specific governance mechanisms to those tensions. We also describe how the tensions vary over the course of solution development. The proposed dynamic framework consists of three phases (experimentation, integration, evolution), separated by two decision points (mutual commitment and balanced power).
In the first phase of solution development, actors engage in small-scale experimentation where governance matching aims to safeguard them from opportunistic behaviors by their counterpart as well as from competitive threats that may result from shifting roles and responsibilities. Asset colocation and network closure are two key mechanisms in this phase. If the match works, actors develop mutual commitment and engage in tacit knowledge integration practices. Governance matching in the second phase involves the coordination of goals and intangible assets, along with safeguarding assets from potential knowledge appropriation by the counterpart. Boundary objects and rights allocation agreements ensure governance matching in this phase. If this integration evolves in a context of balanced power, actors proceed to the third phase of solution development, in which governance matching aims to coordinate the interplay of adaptation and proactivity to deal with unforeseen contingencies. Liaison champions are the core mechanism in this phase. If any matching attempts fail, the process may stall, revert to spot market exchanges, or evolve as vertical integration. As our further analysis reveals, governance matching in solutions entails a careful blending of contractual and relational mechanisms to address the complex, evolving tensions that actors face over the course of solution development. Specifically, the above-described mechanisms delimit risk and promote a collective climate in the experimentation phase, facilitate knowledge-sharing processes in the integration phase, and stimulate a forward adaptation attitude among actors in the evolution phase.
At the managerial level, the core insight of our study is that solutions do not ‘naturally’ evolve, and without ensuring a complex activity of governance matching, actors do not have the proper incentives to engage in the bilateral value creation activities that are at the very heart of solution development. As a first implication from this major insight, our investigation provides practical guidelines to properly execute the governance matching activity, which consists of a series of “governance engineering” tasks. The first of these tasks is monitoring the exchange conditions, which means systematically checking the status of the relation with the solution counterpart. Being vigilant is important for solution developers, but our results indicate that when tensions inevitably emerge, actors need to succeed in a second governance engineering task—designing a coherent set of mechanisms. This goes beyond engaging in the simple choice among single mechanisms by trading off their individual characteristics. Instead, it reflects the capability to design proper combinations of contractual and relational mechanisms to handle the complex and evolving tensions that characterize solutions development. Executing design tasks requires actors to mobilize, and sometimes combine, the various types of knowledge (technical, managerial, and legal) necessary to ensure governance matching across the various phases of solution development. These tasks of being vigilant and designing mechanisms should be put in a dynamic perspective: Solution developers need to periodically assess the development process, evaluate its progress, and take actions accordingly.
In addition to the development of governance engineering tasks, a second practical implication of our study regards the role of existing ties in implementing governance matching. Solution actors face radical changes in their relational habits because the start of the development process forces them to reframe the relational approaches that they have used with business partners. Hence, contrary to the majority of cases in business relations, to succeed in solutions development, actors cannot rely on existing ties or capitalize on prior relationships: They even could act as obstacles to change. Rather, they must reestablish mechanisms to manage their relations from scratch.
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From: Laura Colm, Andrea Ordanini, and Torsten Bornemann, “Dynamic Governance Matching in Solution Development,” Journal of Marketing, 84 (January).
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