The Impact of Management Control System on Social Capital in Supply Alliances

Background and Motivation

In recent times, economic organisations have sought to expand their business through alliances. This has led to a proliferation of many forms of inter-firm alliances among which supply alliances have become a popular strategy. Alliances are said to be vehicles through which organizations gain competitive advantage and by which they improve efficiency and effectiveness (Ring and Van de Ven 1994; Cousins and Spekman 2003). Whilst alliances are said to have the potential to improve organisational performance, existing studies have documented a high failure rate of these alliances (Spekman and Isabella 2000; Ireland et al. 2002). A substantive research has focused on identifying economic control problems in inter-firm alliances (e.g. opportunism, moral hazard and coordination problems) and seeking control mechanisms to mitigate these economic control problems (Van der Meer-Kooistra and Vosselman 2000; Langfield-Smith and Smith 2003; Dekker 2004; Caglio and Ditillo 2008).   

Anoop and Tallman (1998) stress that more attention should also be paid on relationship management process in inter-firm alliances. There are several studies investigating the role that social capital plays in searching and managing the relationship between alliance partners. According to Michael and Deepa (2000), social capital can be defined as a) bridging relationships across various social connections (bridging social capital) b) bonging group members with a common identity and purpose (bonding social capital). Based on a case study of eighteen multinational alliances, Wong and Ellis (2002) argue that ‘social networks provide a valuable resource for reducing alliance partner search costs’ (p.267). Hitt et al. (2002) investigates the importance of social capital in multinational alliances by comparing alliances with an East Asian (Chinese, Korean and Japanese) partner and alliances with a Western partner. They conclude that many Asian firms have a more competitive advantage in the global markets than Western firms due to the high attention to social capital.

In accounting literature, many researches have highlighted that MCS has a significant social effect in managing relationship in alliances (Mahama 2006; Ahrens and Chapman 2007). Chenhall et al. (2010) investigates the relationship between MCS and social capital in and between organisations. They classify three taxonomies of MCS and examine how different MCSs affect the bridging and bonding social capital. Based on framework of formal and informal MCS developed by Chenhall and Morris (1995), they propose that a) formal controls may have a positive effect on bridging social capital through the demonstration of capabilities and reputation to external parties b) formal controls may have a negative effect on bonding social capital due to the damage to customary informal controls c) informal controls facilitate bonding social capital as they allow close and frequent interactions based on interpersonal connections. Based on Simons(1995)’ framework of four levers of control, Chenhall et al. (2010) frames that a) belief systems, boundary systems, diagnostic control systems, and interactive control systems enable the bonding of social capital because a shared, core and collective value can be facilitated under these systems b) belief systems, diagnostic control systems, and interactive control systems have a positive effect on bridging social capital as assist the network extensions c) the mix of different levellers of control may result a contradictory effects of management of control systems on social capital. Chenhall et al. (2010) employ Adler and Borys (1996)’s notion of enabling and coercive controls to theorise the relationship between MCS and social capital. They contend that enabling controls ‘enhance bonding by encouraging identification with goals’ while coercive controls inhibit bonding as inconsistent with sharing of ideas and values that are central to the way that NGO’s operate’ (p.743).

Chenhall et al. (2010) test their theoretical framework based on a non-government organization and get supportive results. Chenhall et al. (2010)’s study is among the first to elaborate the relationship between MCS and social capital in and between organisations. It contributes to our understanding by demonstrating that MCS could either enhance or inhibit social capital. However, Chenhall et al. (2010) regard bridging and bonding social capital as two different dimensions of social capital and investigate the link between MCS and each of these two dimensions of social capital separately. Newell et al. (2004) highlight the need of strong bonding social capital before effective bridging social capital. This suggests the importance of examining bridging social capital and bonding social capital jointly within the entire “social capital network” in alliance study. Further, Chenhall et al. (2010) provides limited understanding of the process of how each linkage between MCS and social capital develops through time. Therefore, this study aims to locate inter-firm alliances within social capital network and investigate the role of MCS in the evolvement of social capital network.

Board Research Question

How MCS influences the evolvement of social capital network in the context of supply alliances?

Theory Development

A substantive research has used actor-network theory (ANT) to study social implications in inter-firm relationship (Callon et al. 1986).  First, Chua and Mahama (2007) posit that the study of MCS in inter-firm alliances should be beyond the dyadic relationship between alliance partners and extend to the entire network with which the alliance interrelates. ANT enables us to study alliance network through social capital and investigate how MCS is implicated in such social capital network. Second, ANT treats human and non-human systematically as actors and focus on the relationality of actors. According to ANT, MCS, bridging social capital, bonding social capital can be seen as non-human actors. ANT seeks to explore how these three actors act on each other and how the relationship among them evolves through time. Lastly, some ANT theorists argue that how two actors influence each other also depends on the relationship between these two actors and other actors. This suggests that “the actors cannot be studied without at the same time paying attention to the network through which their identities are defined (p.52)” (Chua and Mahama, 2007). Therefore, all the actors are directly or indirectly connected and co-influence the performaity of the network. This indicates that bridging and bonding social capital together build up an entire social capital network and they should not be studied separately. The performaity of social capital network is co-influenced by the MCS, bridging social capital and bonding social capital, as well as the relationship between these actors. ANT provides us with a lens to study how MCS, bridging social capital and bonding social capital and the relationship among them jointly influence the evolvement of social capital network.   

Research design and methods

This paper will use a case study method to address research questions. Case study is extensively used in social science studies as it enables researchers to observe a social phenomenon in its raw form (Yin, 2003). This paper aims to investigate the “social capital network evolvement” under the influence of MCS. Therefore, case study is advocated in this paper. Further, according to Benbasat et al. (1987), case study is particularly useful to study “how” questions. Given that the research question in this paper focuses on how MCS influences the evolvement of social capital network, a case study is considered as appropriate. Finally, Coooper and Morgan (2008) contend that case study is superior to other research methods by providing the understanding of uncertain, instable, unique situations. This paper addresses the research question based on the context of inter-firm alliances. Inter-firm alliances are operating with great environment uncertainty (e.g. opportunistic behaviours from alliance partner; market uncertainty). In addition, alliances are operating by at least two distinct interdependent firms, in which both cooperation and conflict are pervasive. These features determine the uncertain, instable and unique context of the research problem in this paper. Therefore, the use of case study is said to be adequate. 

Interviews, observations and archival document will be used to facilitate the case study. The use of observations aims to identify how social capital (bridging social capital and bonding social capital) evolves in raw form. Interviews enable us to collect relevant information about the use of MCS; to verify whether the results of our observations are consistent with interviewee’s views to ensure that the observations have no bias. Archival documents are selected to collect historical information about alliances and to verify the use of MCS is used during a particular period.

The data used to test the research question is to be collected from a small constructions and development company (A) located in Canberra. First, construction and development company heavily relies on buy-supply relationships. This provides potential rich sources of supply alliance that is the context the research question is based on. Second, small- and medium-sized firms are “building more and tighter relationships with other companies to achieve greater external economics of scale, market strength, or exploit new opportunities” (Rosenfeld, 1996, p.247). This highlights the importance of developing and maintaining social relationships in small- and medium-sized firms, which facilitates the examination of research question. Finally, A has an Asian director. Relationship building is predominately in Asian culture (Hitt et al., 2002). Social relationships between organizations are ubiquitous and are of importance in all business dealings of Asian companies (Luo, 2000). This provides a good lens for us to study the social capital network.