A Transaction Cost Perspective on Vertical Contractual Structure and Interchannel

Competitive Strategies
Author(s): F. Robert Dwyer and Sejo Oh
Source: The Journal of Marketing, Vol. 52, No. 2 (Apr., 1988), pp. 21-34
Published by: American Marketing Association
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 F. Robert Dwyer & Sejo Oh

A Transaction Cost Perspective

on Vertical Contractual
Structure and Interchannel
Strategies
Competitive
Despite potent theory to contrast transactional governance in "markets and hierarchies," the variety of
extant channel systems strains this dichotomy. The authors examine three contractually integrated chan-
nel systems in the hardware industry: wholesale voluntary chains, dealer cooperatives, and indepen-
dents. They extrapolate from a transaction cost perspective to frame hypothesized differences in decision
making structures and competitive strategic postures across relational forms. Results from a sample sur-
vey of retail informants are generally supportive.

FOR several years marketershave underscoredthe
fact that interorganizationalcoordination in dis-
tributivesystems is a potential and fundamentalsur-
vival requirement(cf. Guiltinan 1974; Little 1970;
Ridgeway 1957; Ster and El-Ansary 1982). Typi-
cally channel members eliminate redundant roles,
jointly allocate responsibility for key channel func-
tions, and establish communicationand control sys-
tems. Such coordinationinevitably requiresa firm to
understandand manage its dependence on channel
partners.
Membersof a coordinatedchannel system often
invest in dedicatedorder processing equipment, cul-
tivate selective demandby special displays and mar-
keting approaches,and orchestrateextensive training
programsfor effective role performanceby channel
partners.Thus, channel coordinationand efficiency
commonly require investment in business assets
F.Robert Dwyer is Associate of Marketing,
Professor of Cin-
University
cinnati.Sejo Oh is AssistantProfessor of BusinessAdministration, capable.
Kangweon National University,Korea.TheauthorsthankRosemary
Ann
Lagace, Welsh, andthe anonymous JM reviewersforcomments
on previous drafts.TheyalsothankJamesCoryof Hardware Agefor
hisobservations
sharing fundingwas provided
Partial
of the industry.
bytheCollegeof Business AdministrationFaculty Fund,
Development
of Cincinnati.
University
(physical or human) that promise efficiency but may
not be easily redeployable(Williamson 1975, 1985).
High levels of interfirmcoordination, then, are sup-
ported best by assurancesof relationshipcontinuity,
durability, and integrity (Macneil 1980; Williamson
1983, 1984).
Several avenues can be taken to ensure sustained
associations. Vertical integration-actual participa-
tion in upstream or downstream marketing func-
tions-provides continuityof performanceand some
measure of control or governance over marketing
functions. For example, Sherwin Williams not only
manufacturespaints but distributesand sells them to
end users in its own retail outlets. Likewise, Allstate
insuranceis sold directlyby Allstate employees rather
than independentagents.
Vertical integration has its own challenges of
physical asset utilization. The functional responsibil-
ity for inventorymanagement,billing system perfor-
mance, and distributionand sales efficiency is ines-
Humanasset managementrequiresemployee
training, supervision,and motivation.Overall savings
may accrue, however, from reduced expenses asso-
ciatedwith compensatingresellersand monitoringtheir
performance(cf. AndersonandWeitz 1986;Etgar1976;
Phillips 1982).
Alternatively, exchange relations may be sus-

Journal of Marketing
Vol. 52 (April1988), 21-34. CostPerspective
Transaction / 21
Structure
on VerticalContractual
tained by informal and tacit agreements. The parties
to these relationshipshave achieved mutual benefits
fromqualityrole performancein previoustransactions
(Frazier1983b), have come to understandeach oth-
er's preferencesand capabilities, and see good pros-
pects for satisfying exchanges in the future. The par-
ties are not bound contractuallyin the classical sense
(Macneil 1980), but share expectationsfor continued
beneficial exchange. These expectations support in-
creasinginterdependence. Thoughbothpartiesarelikely
to attendto alternativeexchange partners,neitherun-
dertakesseriousor freneticsearching(Dwyer, Schurr,
and Oh 1987).
Between these two extremes are many interme-
diate forms of relational governance, that is, struc-
tures for administeringand sustaining exchange sys-
tems. They includefranchising,systems selling, dealer
cooperatives,wholesalers'voluntaryassociations,and
a host of specially designed contractsthat attemptto
solidify expectationsand obligations and featurecon-
tingent claims, third party mediators, and other ad-
justmentmechanisms.
Objectives
The purposeof our researchis to comparethe effects
of interorganizationalform on (1) decision-making
processes within the channel and (2) the resulting
competitivepostureof the system in the marketplace.
Thus, we heed both Arndt's (1979) call for attention
to interfirmtransactionalgovernance processes and
Goodman's(1979) poignantcommentarythat the do-
mesticationof marketsdoes not circumventthe mar-
ket test of the interfirm system.
Background
Arndt'sprovocativecontention (p. 69) is:
transac-
The competitive market is eroding...
tions are occurring in internal markets within the
framework of long-term relationships. The emerging
domesticated markets call for more attention to the
managementof interorganizationalsystems and to the
political aspects of economic decision making.
Goodmandoes not deny the competitiveadvantagethat
comes from mobilitybarriersinherentin a buyer-seller
relationship(Day and Wensley 1983). In harmonywith
the aims of our study, however, he brings the market
back into focus by underscoringthe role of the inter-
organizational system as a competitive entity itself
(p. 81).
[T]he distinction between . . . "domesticated sys-
tems" and nonintegrated systems is in their degree
and tightness of the internal linkages and flows and
not in their exemption from the final markettest. ..
There is at least strong anecdotal evidence suggesting
that . . . voluntary groups, . . . contractual supply
arrangements, . . . and specification buying con-
April1988
22 / Journalof Marketing,
tracts (e.g., tires, appliances) are structuredin order
to compete with alternative systems not to eliminate
competition.
In framingthese aims we underscoreour intention
to offer an empiricalcontributionto an area in which
significantconceptualprogress has been made in the
past decade (see especially Achrol, Reve, and Stern
1983; Anderson 1985; Arndt 1979, 1983; Coughlan
1985; Frazier 1983a; Jeulandand Shugan 1983; John
1984; Stern and Reve 1980; Williamson 1985). We
thereforeestablishprecedentsand benchmarksin clas-
sificationand operation,and provide inductivefodder
for richertheorizingand followup testing.
We emphasize that very little empirical research
has addressedhow relationalforms affect channel po-
litical and economic processes (Sternand Reve 1980).
Brown's (1981) cross-channel comparison of sup-
plier-retailerrelations, Etgar's (1974, 1976) study of
propertyandcasualtyinsurancedistribution,andReve's
(1980; Reve and Stern 1986) study of interorganiza-
tional structureand sentimentsin Norway are key ex-
ceptions. Brown's explorative work showed the in-
tensityof channelrelationshipsto vary with the degree
of "formalization," thatis, transactionalform per Ster
and El-Ansary's (1982, p. 357) adaptationof War-
ren's (1967) typology. Conventionalsystems had less
intense communicationsthan contractualand corpo-
rate systems. Otherwise, there were no statistically
significant differences in standardization, "defini-
tional reciprocity"(i.e., low centralization),and co-
operation.
Using a sample with more intraformhomogeneity
than Brown's, Etgar found supportfor hypothesized
efficiency advantages("streamlinedintrasystemactiv-
ities and decisions") for centrally coordinated,direct
writing systems over commission-compensatedcon-
tractors, better known as "independent insurance
agents." Etgarcautions, however, that there is much
more empiricalwork ahead. The advantagesof cen-
trallycoordinatedsystems may obtain only from a re-
liance on relatively simple products;"centralizedco-
ordinationmay be less suitable for systems which
handle complex . . . products" (p. 23). Indeed, ef-
ficiency gains may come as a consequence of stan-
dardizationand reducedcustomer services.
Reve tested competing theories for the effects of
vertical coordinationon transactionclimate. Report-
ing mixed empirical evidence, Reve suggests that
institutional economics (Williamson 1975, 1985)
and sociopolitical theory (especially Pfeffer and
Salancik's 1978 resource dependence model) are
complementaryexplanationsof interorganizationalre-
lations. His study provides important direction for
studyingthe structureof interfirmrelations and their
implicationsfor economic conduct (Reve and Stern
1986, p. 99).
Specific Aims
We examine channel structuresand strategies in the
hardwareindustry.Though a significant sector in the
domesticeconomy (40,000 dealersdoing $8 billion in
volumefrom morethan200 full-line wholesalers), the
hardwarechannel was selected because of its well-
documentedchannelstructuresand dominanceby three
forms:dealercooperative(e.g., Cotter,Ace),
structural
wholesaler voluntary (e.g., Sentry, Pro), and inde-
pendent.Firstwe use a transactioncost perspectiveto
develop a conceptualmodel for the effects of inter-
organizationalformon key facets of decision structure
or bureaucratization.We then offer more explorative
expectationsfor each interorganizationalform to em-
phasize unique strategies for serving end-user mar-
kets.
Conceptual Framework
The marketingchannel is an interfirmsystem whose
members,by an exchange of outputs and negotiated
roles, are involved in the process of makinga product
availablefor consumption.A relatively recent devel-
opment in the study of marketingchannels has been
the introductionof transactioncost analysis (TCA)
(Williamson1975). TCA blends organizationtheory,
economics, and modem contractlaw to offer powerful
explanationsof why different structuresare selected
by managersand their environmentto coordinateex-
change.
TCA has been summarizedin the marketinglit-
erature(cf. John 1984; Ruekert,Walker, and Roering
1985). It pays particularattentionto the costs of run-
ning the system-negotiating, assembling informa-
tion, and monitoringperformance.Very briefly, TCA
presumes that market-basedexchange is generally
preferredon flexibility and efficiency grounds. How-
ever, when thereare few candidateexchangepartners,
inevitable "frictions"may cause marketexchange to
"fail," especially if innately imperfectdecision mak-
ers face transactionenvironmentsthat are complex/
uncertain.The key variable in this seemingly pow-
erfulframeworkis opportunism,"self-interestseeking
with guile" (Williamson 1975, p. 26).
Exemplified by distortion of information and
shirkingof obligations, opportunismis consideredan
inherenthuman tendency which, unless bridled by
competitive market structuresor highly measurable
performancein predictableenvironments,will cripple
market-basedexchange. Relationalcontractingor ver-
tical integrationmay be more efficient forms of or-
ganizingfor the transactionif the inherentfixed costs
of governing the exchange system can be amortized
over frequenttransactions.
To augmentand substitutefor negotiationand bar-
gainingover terms of sale in marketexchange, inter-
Transaction
nal and relational forms rely on administrative,bu-
reaucratic arrangements to coordinate member
behaviors. Several dimensions of bureaucraticstruc-
turehave received attentionin the organizationtheory
literature as critical planes of variation, essential
mechanisms of decision-making efficiency, innova-
tion, high morale,and theircounterparts(cf. Daft 1986;
Marrett1971; Scott 1981).
Reve (1980, Ch. 3; John and Reve 1982) com-
bines perspectivesoffered by Aldrich (1979), Van de
Ven (1976), and Warren(1972) to establish central-
ization, formalization, and interactions as "the key
structuralfeatures of an interorganizationalrelation-
ship" (John and Reve 1982, p. 518). Centralization
is "thedegree to which power to make and implement
decisions within the dyadic relationship is concen-
tratedat one vertical level" (p. 518). Formalization
is the extent to which norms of a system are formu-
lated explicitly (Scott 1981, p. 95-9), for example,
via rules, coded behaviors, and emphasis on written
contracts.
We narrowReve's "interactions" dimension,which
emphasizes "task related flows of activities, re-
sources,and information"(p. 31), in favor of the more
precise concept of participation. Following Duncan
(1972) and Hall (1977), we view participationas the
degree of input to decisions, including ideas genera-
tion, decision-makinginvolvement, and goal formu-
lation. Together, in three-dimensionalspace, these
variables "describethe extent to which a market re-
lationshiphas been replaced by an administrativeor
bureaucraticrelationship"(John and Reve 1982, p.
518).
Characterizing Complex Systems
Though the world of channel systems is difficult to
organizeinto Williamson'sdichotomyof "marketsand
hierarchies,"the parsimonyof TCA and its clarity for
polar predictionsmake it a useful starting point for
evaluatingintermediateforms. We begin by attempt-
ing to orderthe three channel forms characteristicof
the hardwareindustryaccordingto their proximity to
marketor internalizedexchange. Our unit of analysis
is the relationshipbetween a retailerand its most im-
portant (highest percentage of purchases) full-line
wholesaler.
Independent. The form closest to market-based
exchangeis probablythe associationbetween retailers
'Though these three facets seem central to understanding vertical
cooperation and program control in our study, other dimensions of
bureaucratizationsuch as specialization and professionalism might have
importantroles in relational analysis that compares systems with dif-
ferent numbers of levels (intermediaries) and which a priori might be
driven by different professional "cultures" (e.g., Palamountain 1955
contrasts uniformly trained pharmacists with other retailer coalitions).
on VerticalContractual
CostPerspective
/ 23
Structure
andindependentwholesalers.Thoughit was the back-
bone of hardwarewholesaling50 years ago, todayonly
about half the field's 210 wholesalers are indepen-
dents. About 80 of the independentsbelong to whole-
sale buyinggroupsfor consolidatedpurchasingpower.
The others are primarilysmall, mostly local distrib-
utors.
Though these wholesalers offer some store pro-
gramsto their retailers(e.g., merchandisingaids and
circularprograms),they have been declining in num-
ber and losing retailcustomersfor severalyears. With
few exceptions, Stem and El-Ansary's(1982, p. 127)
harshassessmentof wholesaling seems germane.
[W]holesalingfirms are, in general, much more
preoccupied with logistical functions than they are
with penetrating markets. The result of this preoc-
cupation has meant that they have been severely out
of position as major changes have taken place within
certain industries ....
Characterizedby limited interdependenceand the
relativelyshallow concernof each memberfor system
performance,the independentsapproximatemarket-
based exchange. The channel relationshipis unlikely
to be secured by an administrativehierarchy, a for-
malized system of proceduresand rules, or an insti-
tutionalizedconsultativestructure.Instead,the system
works on a more organic basis; authorityis shared,
programsare negotiated,and decision making for the
relationshipis collaborative. On the dimensions of
bureaucratizationdeveloped before, we expect low
centralizationand formalizationand relatively high
levels of participationas a result of bargainingover
terms of trade. The scale or scope of the exchange
relationshipis likely to be narrowerthan what could
be supportedefficiently with more vertically inte-
gratedsystems (Andersonand Weitz 1986).
Cooperative and wholesaler voluntary. Two larger
categoriesof wholesalers representa higher form of
vertical coordinationthan the independents. By en-
listing a numberof independentlyowned dealers in a
voluntarygroup (hereaftercalled "wholesalervolun-
taries"), a wholesaler can deliver goods and support
serviceswith greaterefficiency and effectiveness than
the dealers acting on their own. The retailer-spon-
soredcooperative(hereaftercalled "coop")is similar,
but the initiativecomes from retailersratherthan the
distributor.This retailer-organizedand owned whole-
sale company is operateddemocraticallyto perform
services for its members.
Thoughabout65 wholesalersparticipatein one of
the majorwholesalervoluntarygroups (e.g., Western
Auto, Sentry, Trustworthy, Pro), dealer coops ac-
count for nearly 48% of wholesale sales (Hardware
Age 1984). The latter have evolved from playing a
minorrole in the industry(less than 20%) in the early
April1988
24 / Journalof Marketing,
1960s. Todaythey do businesswith two of every three
hardwarestores and home centers in the country.
Stem and El-Ansary(1982) note that, aside from
ownershipdifferences, the two systems operatein the
same basic way. Members agree to purchase a sub-
stantialportion of their merchandisefrom the orga-
nization. They also agree to standardizecertain op-
erating proceduresand to showcase their affiliation
throughstore signage and advertising.These system-
wide programsclarify the total offering of the stores
for consumers.That is, by recognizing a store's logo
consumersshould understandthe dealer's marketing
emphasis, productmix, and service orientation.
Technically,the ownershipdifferencebetween the
two systems is a key distinction in the markets and
hierarchiesframework.That is, dealer coops are in-
tegratedsystems. When retailersjoin the system they
not only agreeto purchasea minimumvolume of mer-
chandise, but also buy "shares"in the cooperative,
some voting, some nonvoting. For example, Ace re-
quiresdealersto invest $5000, Cotter$1000, and HWI
$800 and to make end-of-year stock purchases with
annualrebates. Most dealerpurchasesare on a simple
cost-plus basis, with typically no more than a few
markupcategories. Thoughprogramparticipationcan
vary and purchasevolume and consistency can fluc-
tuate, reflecting the essence of recurrentspot con-
tracts, the moderateup-frontinvestment, vested sup-
plier-basedstore identity, and end-of-yearrebates on
purchasescombine to make for nontrivial exit bar-
riers.
Relatively high exit barriersand backward inte-
grationimplicitly should tend to supportgoal congru-
ence in dealercooperatives(Ouchi 1980). Hence, the
formal structuringof joint stakes should enable more
efficient execution of programsthat have ambiguous
performancemeasures and would otherwise risk op-
portunism. Also, the auditabilityof performance is
enhancedby ownershipvia rationalizedreportingand
control systems.
However, if we considerthe historicalaccountsof
these two channel systems, the literature tends to im-
plicate wholesaler voluntary groups as the more hi-
erarchically administered. That is, the wholesaler is
a locus of authorityand expertise, as well as a source
of leadership.Memberretailersrelinquishsome of their
autonomy to the wholesaler. Thus, these presumed
facets of the wholesalervoluntarysystem tend to pro-
vide the efficiency advantagesof reducedintrasystem
haggling and a latitude of decisions by command
(Williamson 1985, Ch. 3) that make it akin to inter-
nalizationin some respects.
In a retailer-sponsoredcooperative "power is dif-
fused throughoutthe retail membershipand therefore
role specification and concomitant allocation of re-
sources are more difficult to accomplish" (Stem and
El-Ansary 1982, p. 325). Though technically a coop
is an integratedsystem, ownershipis open to dealers
who purchase shares. Twenty years ago Hollander
(1968, p. 133) speculatedthat despite buying power
with manufacturers,diffused power and diverse goals
seemed to precludethematic coordinationof market-
ing programsin dealer coops.
Membership turnover can be high. Coordination is
difficult. Investment in manufacturing or processing
may be hazardous and inadvisable, since acceptance
of the output may not be assured. Financing prob-
lems may inhibit growth, since the members may have
little interest in financing newcomers. . . .Risk al-
location difficulties tend to deter experimentation.
We caution,however, thatmuchhas changedsince
Hollander'sobservations. Membershipin the coops
has increasedfrom 8200 in 1969 to more than 20,000
today. Their growth is credited to several factors by
industryobservers.
The dealer-ownedfirms have a price advantage-which
is their major pitch to the still-unaffiliated indepen-
dent. . . . Today they're not just wholesalers: they're
manufacturers:Cotter and Ace make their own paint
. . . HWI its own windows, etc. They're major na-
tional advertisers. They're professional management
consultants (Hardware Age 1984, p. 60).
Hence, mounting evidence suggests that dealer
coops have been overcomingtheir apparentstructural
limitationsas cataloged by Hollander. It is plausible
that,muchlike relativelyautonomousfacultyat a public
university,membersof a dealer coop will administer
themselvesthroughreasonedcodes of conduct.Though
dealercoops are runby well-paid, experiencedprofes-
sionals (cf. Cory 1983), these managerswork within
a formalized administrativestructure, with explicit
norms, and are approvedby the membership.Thus,
in a sense, coops seem to have opted for a rule-by-
law ratherthan a rule-by-manhierarchy. Formaliza-
tion and centralizationhave been framedimplicitly as
collinearfacets of bureaucratization(cf. John 1984),
but we should give more considerationto their sub-
stitutabilityin transactionalgovernance(cf. Daft 1986,
Ch. 5; Reve and Ster 1986, p. 92-7).2
Furthermore,cooperatives have strategic advan-
tages inherentin their ownership structure.Because
of relativelyhigher levels of wholesaler-retailergoal
congruenceand performanceauditability,coops mit-
2As Reve (1980, p. 253) notes, interpretationsof Williamson's (1975)
framework differ in the definitional boundaries applied to "markets"
and "hierarchies." As we aim to solidify in our study, preservation
of the dichotomy by grouping transactional forms into "integrated"
and "all other" or "spot market" and "all other" distorts key distinc-
tions within groups. "The study of contractual relations plainly in-
volves more than an examination of discrete markets on the one hand
and hierarchical organization on the other. . . . greater attention to
transactionsof the middle range will help to illuminate an understand-
ing of complex economic organization" (Williamson 1985, p. 83-4).
Transaction
igate opportunistictendencies and therefore support
investmentin transaction-specificassets. Privatelabel
paints and windows illustratesuch (upstream)trans-
action-specificinvestmentssupportedby coops' down-
streamgoal cohesion. Just as direct writing in insur-
ance allowseffectivemass merchandising(Etgar1976),
the dealer cooperativesupportsnational and regional
advertising efforts by the wholesaler. In both in-
stances, seller influence at the point of sale typically
can overridemass media messages (Porter 1974); in-
dependentscould rely on the advertising for traffic
generation,then opportunisticallyswitch customersto
competingsuppliers'products.
We do not suggest that coops were formed to mit-
igate opportunism.Today's governanceforms are the
net of priorstrategicchoice and environmentalselec-
tion. That is, organizationalsurvival flows from the
fit of business conduct and market contingencies or
otherenvironmentalimperatives.Early motivationsfor
independentretailersto join a coop or wholesalervol-
untaryincludedimprovedretailpractices(accounting,
buying, display, advertising),lower cost merchandise
(leadersandprivatelabels)(Duncanand Phillips 1946),
and "escaping chain store taxation and maintaining
greaterflexibility in prices, hours and special services
to customers"(Stewart and Dewhurst 1939). Seem-
ingly consistentwith Guiltinan's(1974) model of evo-
lutionarychange in channelsis the fact that coops and
voluntaries have achieved cost efficient functional
structuresand significant control and integration of
wholesaling and retailing activities. It is from their
currentstage of evolution that we posit their bureau-
cratic structureand competitive advantages(cf. Nel-
son and Winter 1982 on the evolution of distinctive
skills).
Internal Administration Hypotheses
The preceding deductive reasoning from TCA (Wil-
liamson 1975) coupled with limited induction from
descriptiveaccounts in the trade press and channels
literaturesupportsthe following hypotheses.
H1: Wholesaler voluntariesexhibit the high-
est, independentsthe lowest, and dealer
cooperatives midrange levels of central-
ized wholesaler authority.
H2: Dealer cooperative groups exhibit the
highest, independents the lowest, and
wholesalervoluntariesmidrangelevels of
formalization in wholesaler-dealerrela-
tions.
H3: Wholesaler-sponsoredgroups exhibit the
lowest, independents the highest, and
dealer cooperatives midrange levels of
wholesaler-dealerparticipation in deci-
sion making.
on VerticalContractual
CostPerspective
/ 25
Structure
Hypothesized Competitive Strategy
Implications of Interorganizational Form
We expect the threechannelstructuresto play out dif-
ferentmarketingstrategies. "The essence of strategic
managementis an integratedorganizationalemphasis
on securing and sustaining a competitive advantage
withinthe marketsservedby individualbusinessunits"
(Day and Wensley 1983, p. 80). Given a set of dis-
tinctive competencies arising from their relationship
with the supplier,retailmemberswill emphasizethose
advantagesin theirmarketingprogramming.Key ele-
ments of retail strategyinclude store location, target
marketselection, low price emphasis, and differen-
tiation on such facets as assortment,service, consis-
tency, and quality (cf. Arnold, Capella, and Smith
1983). Assuming that locational strategies are gen-
erally outside the purview of retailer-supplierrela-
tions, we considerchannel structureconsequenceson
the other key strategicvariables.
Governancestructuresare believed to vary in their
abilityto supportdifferenttypes of strategicaims (cf.
Ruekert,Walker, and Roering 1985). Hence, it may
be possible to match structureswith strategy in dis-
criminatingways. Because of the small size and re-
gional orientationof the independentwholesalers and
their relatively low capability for vertical coordina-
tion, the independents'best strategywould be to em-
phasizetargetmarketselection, specifying the bound-
ary of the productmarketfor maximizingefficiencies
of informationexchange, negotiation, and monitor-
ing. Thus, their dealers seem likely to concentrateon
small marketniches and perhapsemphasize a partic-
ular service or productline. Independentwholesalers
lack the buying power to supporttheir customersin a
low price strategy. The structureof the relation does
not seem capable of providing wide assortmentsand
comprehensiveprogrammingaids. Thus, largely be-
cause of the lack of alternativestrategiccourses, we
suspect independentswill opt to focus on specific
marketsor merchandisecategories.
In comparisonwith the other structures, whole-
saler-sponsoredvoluntarygroupsare likely to achieve
high levels of merchandisingcoordination and pro-
motional harmony. Their centralized authority pro-
vides an adaptabilityadvantagein that retailershave
providedrelatively open-ended commitmentsto fol-
low wholesalerprograms.This relationalfacet can lead
to greaterstrategicemphasis on store format, private
labels, and adaptive promotionalcampaigns. Never-
theless, these commitmentsmust be enforced by the
wholesaler and hence confined to activities that are
readily measuredby inspecting output or monitoring
effort. Finally, the buying power of wholesaler vol-
untariesis generallyless than that of the cooperatives
(HardwareAge 1984). This fact plus their vested au-
April1988
26 / Journalof Marketing,
thorityto differentiateon the bases outlinedbeforemake
wholesalervoluntariesunlikelyto emphasizea low price
strategy.
Dealer cooperatives seem capable of gaining a
competitiveadvantageby following two principalre-
tail strategies. First, the large numbers of members
and sophisticateddistributionsystem supportwhole-
sale buying power with manufacturers,which should
make possible a low price strategy. However, there
are two reasonsnot to expect such an emphasis. First,
because the tradehas an inherentassortmentand ser-
vice emphasis, large numbers of coop members are
unlikelyto pursuethe low price strategy. Second and
perhapsmore importantis the fact that such a strategy
is difficult to sustain against the variety of intertype
competitorssuch as discounthouses, mail orderchains,
and warehousehome centers.
A second approachis more promisingand consis-
tent with coops' structuraladvantagesover competing
channel systems. Dealer coops are able to extract
commitmentsbased on goal congruence. That is, be-
cause the ownershipstructureof the cooperative sys-
tem mitigates opportunismin the channel, it should
have a competitive advantagein mass merchandising
and differentiationthrough store advertising. These
strategicactions yield higher payoffs to coops than to
other channel structuresbecause of inherently lower
monitoring costs and goal congruence benefits re-
flected in diminishedfree-ridertendencies. Thus, ex-
ecuted with less "friction," wholesaler affiliation in
advertisingand use of sales promotions are the dif-
ferentiatingstrategiesof coop retailers.
To summarize, for interorganizationalform ef-
fects on retail strategies, we offer the following ex-
plorativehypotheses. In comparisonwith other chan-
nel forms:
H4: Independentshave a greaterinclinationto
targetand serve small marketsor empha-
size specialtyproductsin theirretail strat-
egy.
H5: Affiliates of wholesaler-sponsoredgroups
differentiateon the basis of promotional
specials, assortment,and service.
H6: Members of dealer cooperatives empha-
size affiliation in advertising.
Method
Our sample frame was the Yellow Pages listings of
hardwarestores in 10 cities representinga mix of geo-
graphicareasacross the United States. Fromour com-
piled list of approximately400 stores, we eliminated
branchstores of local multiples and deleted stores in
two large cities on an nth-name,systematic basis to
ensure a maximumof 40 stores per city.
 Then we telephoned212 hardwareretailersto (1)
verifyaddresses,(2) identifythe managerof each store,
and (3) call attentionto the forthcomingmail survey.
Of the 212 retailers, 19 did not answer or had dis-
connected numbers, four had gone out of the hard-
warebusiness, and threerefused to participate.Hence
we mailed questionnairesto 186 dealers.
Dealer informantswere given a $5 token of ap-
preciationfor their anticipatedcompletionof the mul-
tipagequestionnaire.A summaryof resultswas prom-
ised to interestedrespondents,a returnenvelope was
provided, and a reminderpostcard was sent 10 days
aftermailout.With adjustmentfor one mistargetedre-
cipient who reportedhaving left the hardwarebusi-
ness, our response rate five weeks after mailout was
71% (133/185).
BureaucratizationMeasures
Indicantsof bureaucraticstructuringhave evolved sig-
nificantly in the last decade of channels research.
Drawingfrom empiricalwork in organizationtheory,
John(1984) developed measuresof centralizationand
formalizationthat evidenced reliability and validity.
Inspiredby his scales, we customized 5-item mea-
sures of centralizationand formalizationin the hard-
ware industry.Centralizationitems included the need
for permission, freedom to make program adapta-
tions, and the force of supplierrecommendationsand
suggestions.Formalizationincludedstandardizedpro-
cedures, specified responsibilities,reliance on written
contracts,and orderpolicy.
Participationhad more eclectic origins (Dwyer and
Welsh 1985;JohnandMartin1984;Spekmanand Ster
TABLE1
Summary of Content, Internal Consistency, and Discrimination of Bureaucratization Measuresa
No. of
Items
Scale Initial/Final Sample Item
Centralization 5/4 For many facets of running
this store I yield to
recommendations of my
primary w/s
Formalization 5/4 My relationship with our
w/s is governed primarily
by written contracts
Participation 7/7 My ideas for ordering,
selling, and servicing are
welcomed by our primary
w/s
"Allitems use 5-pointLikertscales. Forthe 3-factormeasurementmodel, X2(84)= 114.3, p < .02, goodness of fit index = .89,
adjustedgoodness of fit index = .86, root mean squareresidual= .08.
bErrorterms of reverse-coded items are allowed to correlate.
*Significant at p < .01.
Transaction
1979). Therefore our instrument contained "extra"
participationitem candidates, including encourage-
ment of ideas, opinions, and suggestions; involve-
ment; consultation;and appreciationof concerns.
Table 1 gives illustrative items, LISREL X2 sta-
tistics showing item convergence in a single-factor
model, reliabilitycoefficients, and correlationsamong
the item-summedvariables. The scales show conver-
gence with minimalitem deletion. We allow the error
terms of reverse-scaleditems to correlatein the par-
ticipationscale, as previous work with the scales in
anotherstudy revealed a contextual or methods bias;
negativelywordeditems were not the reverse of their
positively worded item counterparts(cf. Gerbing and
Anderson1984). Alpha coefficients are sufficient for
our purposes. Low correlationsamong item-summed
variables and an acceptable measurementmodel in-
dicate discrimination.
Business Strategy Measures
We used Porter's(1980, Ch. 2) generic strategiesand
common typologies of retail strategies (cf. Arnold,
Capella,andSmith1983;McCarthyandPerreault1984,
p. 403) to develop a 12-item battery of Likert scale
statementsof strategicemphasis. With constraintson
overall questionnairelength, we included three items
each for what we held as the two most easily grasped
strategies,(1) marketniching and (2) low cost (price)
emphasis. We developed two items we anticipated
would measure dealers' reliance on sales service by
store personnel. Finally, four items were developed
to measurethe use of othermeans of "differentiating"
the store: assortment,wholesaler affiliation, promo-
Correlations
Among Item-Summed Scales
x2 (d.f.) Alpha Centralization Formalization
1.13(2), p = .57 .72
.60(2), p = .74 .68 .33*
15.32(11),b p = .17 .79 .13 .01
on VerticalContractual
CostPerspective
/ 27
Structure
tional prices, and nationally branded merchandise.3
Because the full set of items is not unwieldy, we re-
port our results at the item level. We suspect this level
of detail will also support further research in the area.
Results
Table 2 is a profile of our sample on key classification
data obtained. Channel structure designations were
3Overall, our a priori item designations were verified empirically
by factor analysis. The four differentiation items loaded on their own
factor. With one exception (attention to buying), the low price items
comprised their own factor. The sales service items loaded .78 and
.45, respectively, on their own service factor. One of the items in-
tended as a niching measure cross-loaded on this apparentservice fac-
tor, suggesting a possible confound of two strategic postures in the
scale. Because the wording of this item touched both facets ("best
overall service to a small target market"), the item was deleted. Oth-
erwise, the niching items were the only variables loading on two mi-
nor factors (5.2 and 4.1% of variance) in the model.
derived ex post from dealers' reports of the identity
of their most important (in percentage of purchases)
wholesaler. On average, retailers deal with 3.6 whole-
salers, make 65% of their purchases from their pri-
mary wholesaler, and make 15% from their secondary
supplier.
Six retailers are not included in the table because
they did not identify their principal wholesaler or their
principal wholesaler was not in hardlines. We then
worked from the wholesaler's identity and a directory
of wholesalers (Hardware Age 1984) to classify chan-
nel forms. A second coder applied the same approach
to a subsample of 30 stores to identify classification
difficulties. Both coders agreed on all 30 wholesaler
classifications.
Perhaps surprisingly, dealers using independent
wholesalers report sales and employee levels that are
as large as those of members of dealer coops. Whole-
saler voluntaries are the least profitable group on both

TABLE 2
Sample Profile
Statistics for
Retailer Wholesaler Differences
Cooperatives Voluntaries Independents Across Channel
Characteristics (n= 58) (n = 45) (n= 24) Forms
Store Location (%)
Multiple locations 16 7 19
Free standing 50 60 57
Other (mall, strip) 34 33 24
Total 100 100 100 X2 = 4.69
Number of Employees
Range 2 to 86 1 to 33 1 to 75
Mean' 14.5A 6.78 13.4AB F = 3.32*
Median 8 4 5
Last Year's Sales ($000)
Range 200 to 12,000 10 to 4000 50 to 6300b
Mean 1517 697 1636 F = 2.11
Median 700 213 285
Share of Sales In:
Sample (row sum = 1.0) .46 .27 .27
HardwareAge (1984) .48 .34 .18
w/s vol.
Last Year's ROI(%)
Range (5) to 42 (5) to 42 (5) to 55
Mean8 13.2 7.3A 15.0A F = 3.35*
Median 12.0 7.0 7.0
Perceived Relative
Profitability(%)c
Above average 35 17 29
Average 51 39 42
Below average 14 44 29
Total 100 100 100 X2 = 11.53
"ForF-statisticsimplicatingrejectionof the hypothesisof equivalentmeans, group means with a common letter superscriptare
not significantlydifferentper the Bonferronicontrastprocedureand a two-tailedfamilyalphaof .10.
bN = 23 as one outlier emphasizing lumber (sales = $45 MM) is excluded.
clnterpolated10-pointcategoricalscale: bottomcategory"negative,"coded -5%; top category"50%or more,"coded 55%.Only
one firmis in this top categoryand 17 are in the bottom.
*Significantat p < .05.

April1988
28 / Journalof Marketing,
the perceived, relative measureand quantifiedreports
of ROI. Otherwise, the three dealer groups are very
similar:most are free-standingstores, employingfewer
than 10 people, with median sales of about $.5 mil-
lion. Finally,the shareof marketfor each channeltype
in our sample closely corresponds to the share of
wholesale volume attributedto each type in the most
recent survey from HardwareAge (1984).
Bureaucratization Across Channel Forms
In Table 3 we reportthe mean levels of bureaucratic
structuringin each of the systems. Significant multi-
variate differences obtain in bureaucraticstructures
across the three systems, but univariatetests reveal
only mixed supportfor the hypotheses. First, there are
no significantdifferences in centralizationand partic-
ipation in decision making. Though wholesaler vol-
untariesemerge as the most centralizedand least par-
ticipative,distinctionsacross channel forms are subtle
shadingslabeled significantonly by more statistically
powerfuldesigns.4
Second, independentsand wholesaler voluntaries
appearequallyformalizedin theirdealerrelationsbut,
in supportof H2, dealer coops are clearly more for-
malized than wholesaler voluntaries. Coops' equiva-
lence to independentsis due primarily to the small
numberof independentsin the specific contrast. This
findingreflects the administrativemechanismused by
a coalition of largely autonomousmembersto govern
their association. That is, in the absence of a recog-
4If the true effects of channel system on centralization and partici-
pation are of the magnitude inferred from these data (R2 = .02), they
qualify as "small effects" per Cohen (1977, Ch. 8) and the power of
our F-test, at cx= .1, is only about .6. To hold future research at-
tention, however, we caution that percentage variance can be a mis-
leading index of the influence of systematic factors where there are
"processes by which individually tiny influences cumulate to produce
meaningful outcomes" (Abelson 1985, p. 129).
TABLE3
Mean Levels of Bureaucratic Structuring in Three Channel Systemsa
Retailer
BureaucraticStructural Cooperatives
Dimension (n = 58)
Centralization 1.78
Formalizationb 3.37A 3.03B
Participation 2.96 2.73
Multivariate summary: Wilks' K = .87, F(6, 224) = 2.65, p < .02
aMeans are scale scores divided by number of scale items completed. High scores indicate presence of named structural feature.
bGroupmeans with a common letter superscript are not significantly different per the Bonferroni contrast procedure and family
alpha of .10, one-tailed tests per our hypotheses.
*Significant at p < .06.
Transaction
nized hierarchythey rely on rules and proceduresto
administerthe system. This finding generates new
thinkingabout administrationin dealer cooperatives.
Rules and proceduresneed not be hierarchicallyap-
plied;they may resultfromdemocraticprocessesamong
members attemptingto survive in a competitive en-
vironment.
Strategy Implications of Channel Form
When the channel relationshipsare played out in the
marketingstrategies of dealers, we find significant
multivariatedifferences across systems and general
supportfor our second groupof hypothesesin the uni-
variateresults in Table 4. More than either coops or
wholesalervoluntaries,dealers suppliedprincipallyby
an independentwholesaler are likely to adopt a nich-
ing strategy.In supportof H4, they are likely to serve
a small marketof little concern to competitors(item
1) andemphasizea particularline of merchandise(item
2).
Though not framedby an explicit hypothesis, our
finding of no significantdifferences in low price em-
phasis (items 3-5) across the three systems is consis-
tent with our expectations. Perhapsdealers pursuing
a low price strategyuse direct buying and play com-
peting secondary suppliers off one another for dis-
counts, ratherthan maintainingrelations with a prin-
cipal supplier.Overall, however, hardwaredealersare
not inclined to embrace a low price strategy;on av-
erage within each structure,retailers "disagree"with
statementsimplicatinga key role for low price strat-
egies. Instead, sales service seems to be a universal
aspect of hardwareretailing. Not the focus of an ex-
plicit hypothesis, the sales service emphasis (items 6,
7) of hardwaredealers averages 3.87 to 4.82 on a 5-
point scale across all three systems.
The finding that wholesaler voluntaries differen-
tiate themselves from independentsin the use of pro-
motional specials (item 10) lends only weak support
for H5. Though they also lead independentsin em-
F-Statistics for
Wholesaler Differences
Voluntaries Independents Across Channel
(n = 45) (n = 24) Forms
1.98 1.83 1.09
3.07AB 3.04*
2.81 1.30
a
on VerticalContractual
CostPerspective
/ 29
Structure
 TABLE 4
Mean Levels of Emphasis on 11 Strategic Orientations by Retail Participants
in Three Channel Systems'
F-Statistics for
Retailer Wholesaler Differences
Cooperatives Voluntaries Independents Across
Strategic Orientation of Retailer (n = 58) (n = 45) (n = 24) Channel Forms
Market Niching
1. The market we serve is really too
small or too remote to receive
significant attention from
competitors.b 2.03A 3.12**
2. We don't try to do everything. We're
more of a specialty hardware store
emphasizing particular lines of
merchandise. 3.42 6.77*
Low Price Strategy
3. We will not be underpriced. 2.16 2.33 2.39 .68
4. We're the discount price leader. 2.00 1.91 2.04 .24
5. We give a lot of attention to buying
to give our customers the lowest
price. 2.21 1.51 2.12 1.42
Sales Service
6. We're here to solve customers'
problems. They'll get prompt sales
assistance and the right product for
their needs. 4.79 4.82 4.70 .50
7. Sales personnel have extensive
home improvement experience and
product knowledge. 4.09 4.14 3.87 .79
Other Means of Differentiation
8. More than other dealers we try to
carry a broad assortment of
merchandise.b 1.82***
9. We emphasize our affiliation with a
major wholesaler group via
storefront signs, distributor label
merchandise, and local advertising.b 4.36A 3.56B 20.19*
10. We frequently run specials on
seasonal or branded items to
generate store traffic.b 3.35 5.13*
11. We sell nationally branded products
at a fair price. 4.19 4.27 4.00 .92
= = < .01.
Multivariatesummary: Wilks' K .57, F(22, 214) 3.15, p 1 strongly disagree.
8Means are 5-point Likertscales: 5 strongly agree,
- . . . -

aMeans are 5-point Likertscales: 5 = strongly agree, . . . 1 = strongly disagree.

bFor F-statistics implicating rejection of the hypothesis of equivalent means, group means with a common letter
superscript are not significantly different per the Bonferroni contrast procedure and a family alpha of .10, one-tailed
test per our hypotheses, two-tailed otherwise.
*Significant at p < .01.
**Significant at p < .05.
***Significant at p < .20.

phasis on wholesaler affiliation (item 9), voluntaries
have no statistically significant breadth (item 8) or
service (items 6, 7) advantage over independents.
Comparing wholesaler voluntaries with coops, we
find the two systems equally inclined to emphasize
assortment, price specials, and nationally branded
merchandise (items 8, 10, 11). On national brand em-
phasis, no channel system holds a significant differ-
ential advantage.
Supporting H6, dealer cooperatives lead in differ-
entiation on wholesaler affiliation (item 9). They tend
to emphasize their wholesale membership through
signage, distributor brands, and advertising. TCA
predicts that dealer cooperatives have a structural ad-
vantage for pursuing this strategic course. Indeed,
managerial policy, environmental selection, or both
have resulted in interchannel strategies that leverage
this strength.

April1988
30 / Journalof Marketing,
 Discussion
Bureaucratic Structuring
There are a great many ways to administerongoing
exchange relationships in marketing channels. Be-
tween the polarizedtransactionalforms of marketsand
hierarchiesis a largely neglected middle ground that
includes three prevalentcontractualforms. Our mul-
tivariatestatisticalevidence suggests that bureaucratic
structuraldifferences across the three forms are sig-
nificant.Somewhatsurprisingly,however, most of our
multivariatesignificance is accounted for in differ-
ences in formalization.Our most provocativehypoth-
esis-built on inductionand reasoningby analogy-
is supported;dealer cooperatives reflect the highest
degree of formalization.
An administrativehierarchyis unlikely to emerge
or thrive in the coops because (1) power is diffused
and (2) coop memberscan leave the system or, more
likely, scale back their commitment(purchases).Even
in the absence of a prominentleadershipposition, a
coop can achieve channel coordination,a unified im-
age, and system survival, even growth, throughrea-
soned codes of conduct approvedand maintainedby
the membership.In essence, in place of commandfrom
a center of authority, the system is administeredby
effective proceduresthat appeal to the membership.
A coop is subtly yet vitally different from the arche-
typical system of workers whose employment con-
tractstie them into a formal hierarchy.Instead, deal-
ers buy into the cooperative's code of conduct and
system of memberrights.
That overall differences in the other two facets of
bureaucratization, participationand centralization,are
minor may be a consequence of three factors. First,
the measures may not be sufficiently sensitive. The
responsivenessof similar measures in other channels
research(cf. Dwyer and Welsh 1985; John 1984) tends
to discountthe likelihoodof this effect, however. Sec-
ond, subjects in the three channel groups may have
interpretedthe bureaucraticstructuresmeasures suf-
ficiently differentlyto mask true distinctionsin inter-
organizational governance. However, the internal
consistency of the measures tends to refute this con-
jecture.
Third, and perhapsmost likely, the relatively bal-
anced power structureof the hardwareindustry may
tend to homogenize de facto interorganizationalgov-
ernancestructures.Thatis, a hardwaredealerhas sev-
eral alternativesuppliers. Each has some degree of
marketingand distributionprowess. Indeed, 65% of
the dealers in a Hardware Age (1984, p. 43) survey
rely on four or more wholesalers.
[O]ne retailerrespondingto the 1984 survey com-
ments:"Onesuppliercannotsupplyanyretailstore
Transaction
completely." . . . the comment underscores the
competitiveness of today's wholesaler marketplace.
Thus, with productdifferentiationcommonly oc-
curringat the point of sale and several supplierstyp-
ically competingfor accounts, a wholesalerthat over-
centralizesdecision making and does not encourage
dealer participationin marketingprogrammingrisks
losing share of business from any account and might
even jeopardize relationships.John (1984) has high-
lighted conceptuallyand empiricallythe capacity for
bureaucraticstructuringin a franchise system (high
power implicitlyresiding with the franchisor)to crip-
ple attitudinalsolidarityand cooperation.Unlike John's
gasoline dealers, hardwaredealersalienatedor so dis-
affected by bureaucratizationcould scale back their
dependenceon the "offending"supplier. Perhapsre-
flecting wholesalerrecognitionof dealers' capacityto
alter interdependence,our data show no association
betweenthe three facets of bureaucraticstructureand
(1) percentageof purchasesfrom primarywholesaler
and (2) numberof suppliersused by a dealer.
Strategy and Channel Form
Retail strategy distinctions across interorganizational
formsare significant.Independentwholesalersare most
likely to enableretailers'strategiesof marketniching.
Both retail coops and wholesaler voluntariesempha-
size differentiationin assortment, promotions, and
brandedmerchandise.Dealers in coops appropriately
leveragetheir structuraladvantagefor controllingop-
portunismby giving significantlymore emphasisthan
either of the other groups to their wholesaler affilia-
tion in advertisingand merchandising.
We emphasize, however, that these strategiesare
pursuedand executed by retailers. There is no ques-
tion that the principalwholesaler plays a significant
role by orchestrating,enabling, and magnifying key
aspectsof the strategies.In addition,however, it may
be with key strategic aims that both wholesaler and
retailerselect each other as partners.Certainly, be-
cause of intertypecompetitionin hardwareretailing,
a wholesaler can choose to supply variety, grocery,
lumber, or other stores. A wholesaler also has a po-
sitioning opportunityas the secondary supplier to a
segmentof hardwaredealers. Though we omit such a
nichingpossibility in our focus on principalsuppliers,
our findings suggest the need for careful selection of
channelpartnersregardlessof position as wholesaler
or dealer-especially given the inherent uncoupling
difficultiesin channelrelations.The partnershipforged
in the channel has undeniableconsequences for stra-
tegic capabilitiesand emphasis.
Limitations and Future Directions
Ourworkhas severallimitations.Dealermanagersmay
be appropriateinformantson theirretailstrategies,but
onVertical
CostPerspective
Structure
Contractual / 31
may not reflect accurately wholesaler perceptions of
bureaucratization; neither group's perceptions may
capture the "truth," regardless of dyadic agreement
levels. We should note, however, that John and Reve
(1982) have obtained acceptable levels of agreement
from retailers and wholesalers reporting similar struc-
tural properties of the channel.
Several factors besides contractual form may af-
fect bureaucraticstructures. Organization theorists have
considered and examined empirically the effects of
environmental uncertainty (cf. Lawrence and Lorsch
1967; Spekman and Stem 1979), resource dependence
(cf. Aldrich 1979; Dwyer and Welsh 1985; Pfeffer and
Salancik 1978), technology (cf. Meyer, Scott, and Deal
1983), power (Stem and Reve 1980), and organiza-
tional size (cf. Jackson, Morgan, and Paolillo 1986;
Kimberly 1976). We underscore the need for richer
theory on the antecedents and consequences of bu-
reaucratic structuring in interfirm relations, including
conceptual attention to the interorganizational contex-
tual meaning of size.
In addition, we point to the need for considerable
measurement refinement to reflect marketing strate-
gies. If Porter's taxonomy is to prove useful for future
work, particular attention must be given the generic
strategy of differentiation. In comparison, the niching
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