Channel relationships and opportunism: What does trust and ethics have to do with it?

Written by UD Business Review | Oct 8, 2024 8:42:20 PM

Based on research by Richard J. Miller, DBA, Laura Munoz, PhD, and Michael Mallin, PhD

We were interested in exploring whether contracts, trust, and ethical levels have an impact on opportunism in marketing channel relationships. We specifically investigated the relationships between manufacturers and distributors and whether they were focused on short- or long-term relationships. The data came from 145 distributors from all over the U.S.

The first, and very surprising result, is that enforcing contracts alone is of no significance to
whether opportunistic behaviors take place in these relationships. That does not mean contracts are not needed as they provide legal protection, define the relationship, and set rules for exchanges of information. It calls for attention to other factors as well as other dynamics present in these relationships.

Regarding these relationships we uncovered that:

Focusing on trust in the relationship reduces the likelihood of opportunistic behaviors.
The reason for this potentially being that the stakes might not be too high on either side
and do not value the relationship yet. Another potential explanation could be that the
party might still be willing to grow the relationship.
Selecting a partner with high ethical levels reduces the likelihood of opportunistic behavior. Thus, when searching for a new supply chain partner, having a contract and
observing they adhere to legal standards is the minimum expected. A partner’s values
that align with the supply chain operations lead to not only strengthening relationships
but to also impacting the levels of value customers receive.
Trusting a partner, along with contractual enforcement, can lead to opportunistic behaviors. This is because trust acts as a bridge to allow for opportunism. We argue the reason being is that their commitment towards the relationship is low as they do not draw many benefits from the relationship (also known as calculative commitment).

Key Points

When manufacturers and distributors, as well as many other parties, engage in a relationship, these can be either short-term, i.e., transaction-based or long-term, i.e., relation-based, and these may affect the level of opportunism.
Opportunism in business is a behavior where candor or honesty is non-existent in transactions and one side takes advantage of the other.
In marketing channels, opportunistic behavior can be exemplified when one of the parties, or members engages in breach of contract, concealing attributes and preferences, engaging in deceitful threats and promises when interacting with other members or censoring information.
Contracts, which are governance mechanisms, become one of the most important mechanisms not only to deter opportunism by stipulating rewards and punishments but also to launch long-term commitment and provide options if exchange issues were to arise.

Why This Matters

The type of relation, whether transaction-based or relationship-based has different effects on opportunism. A manager cannot simply define the type of relationship and from that information, know the best way to reduce opportunism. Our findings show
that trust in a relationship-based interaction can lead to more opportunism. We believe that is due to being comfortable or that small transgressions, when focusing on the relationship, will not lead to the end of the relationship. Thus, vigilance needs to be
maintained or the transgressions, while not welcomed, may be lower than the cost of monitoring for them.

A second, and equally important, finding is that the searching for new partners and the outset of the relationship are critically important. The ethical level of the partner had the most significance in our findings. This attribute of a partner is not likely to change substantially over time, unless it decreases, due to the time and energy required to make a partner more ethical. Thus, a key search parameter, in addition to audits and other verification and validation tools, needs to be of primary concern, especially in relationships that can be hard or expensive to monitor opportunism.

Want to know more?

The knowledge about contracts is an ever evolving area of interest to companies and supply chains. The following links provide more information about external factors affecting contracts and how to better manage them strategically.