- 1. Mark Bergen, Shantanu Duytta &Oroville C. Walker, Jr.
Journal of Marketing, July, 1992Presented by: Doroteia Vduva,
Yenita Mulia, and Theodore HileMF455 Distribution
StrategiesNovember 5, 2010
2. May improve understanding of Why organizations exist How
organizations work This viewpoint may be arguable, however... What
is clear: Agency theory is applicable to marketing management 3.
Anagency relationship is present when one party is dependent on
another for some action on the Principals behalf. 4. The hiring
firm, or manager representing the owners interests, is the
Principal. The employee is the Agent. Multiple employees in
multiple levels within marketing organizations require management
of agency relationships. 5. Facilitating agenciesspecialists in
implementation of marketing programs: Advertising agencies Public
warehouses Research suppliers Exchange-transaction facilitators:
Wholesalers Retailers Franchisees ...and even...customers! 6.
Agencytheory uses metaphor of contractto describe relationships
where one partydelegates work to another Focus of theory is on
determining the mostefficient contract to govern the
relationship,given participant nature and anyuncertainty in
environment 7. Contracts can be either.... Formal and explicit,
written documents Informal and implicit, social contracts
Over-riding assumptions Efficiency is determined from the
Principals pointof view The Principal is the dominant party in
therelationship Contracts are implemented to deliver the
best-possible outcome for the Principal 8. Pre-Contractual problems
Focused on Agent capabilities, skills Principal seeks to determine
Agent suitability Principal must use good judgment and
goodinformation strategy to make Agent-selections Environmental
conditions and uncertainty areconstraints on action and solutions
Goal: Develop framework for dealing withproblem of hidden
information This is Hidden Information Model 9. Post-Contractual
problems Occur after contract-relationship is created Concerns
about Agent performance and rewards Motivation toward Principals
goals important Information system for Agent evaluations essential
Creating appropriate Agent compensation andincentive programs--
Goal: Address problem of hidden action This is Hidden Action Model
10. Post-Contractual Issuesbetween Principal and Agent in Marketing
Management 11. Assumptionsabout Principal and Agent Both are
motivated by self-interest Both are interested in maximizing
profits/utility It is possible to include social goals in this
context (the double bottom-line) Principals have incomplete
information Principals knowledge of Agent actions imperfect
Self-interested Agent holds information Principal wouldlike to have
Self-interested Agent may be reluctant to share data,may send false
information to Principal 12. Realized outcomes are Partly
determined by environmental factors: Competitors actions
Technological changes Agent behavior Uncertainty is present
because... Factors change over time Changes are difficult to
predict Changes are outside control of Principal and Agent
Uncertainty makes it impossible to craft a good contract with
minimal risk to Agent 13. Agent acts to maximize his/her utility
bychoosing the best action available Action may conflict with
Principals goals Principals desired actions may be costly to
Agent(in terms of time, resources, effort) Shirking is a risk when
Agents own goals conflictwith Principals desires Thereare two
possible paths to follow to gain Agents action toward Principals
desired goals... 14. Monitoring Agents... Principal can monitor and
reward Agents based on information about their behavior-- Call
reports, attaining other activity goals Sales-related activity
(presentations, etc.) Drawbacks to this approach-- Quality of
activity can be questionable Collecting information can be costly
Information asymmetry can still inhibit most efficientcontract
performance 15. MotivatingAgents: Principal can motivate Agent with
rewards biased toward performing actions with Higher realized
profits or better sales-volume outcomes Necessary conditions--
Goals must align with individual rationality of Agent Desired
activity payoff must be enough to beatreservation utility of other
opportunities Feed the dogs what they will eatthis is
incentivecompatibility (Agent and Principal both get what theywant)
16. Ultimate Principals goal: Design a contract that will obtain
the constrained best outcome that is incentive compatible for the
Agent Problem: Outcome based contracts shift substantial riskfrom
the Principal to the Agent... This can be costly for the Principal
if the Agent ishighly risk-averse 17. Heart of Hidden Action model
problem Designing a contract that provides an efficient trade-off
between: Costs associated with shifting risk to Agent... Reducing
probability of Agents shirking... The solution is dependent on
level of environmental uncertainty, and... ...tasks assigned to
Agent, and... ...goals and risk preferences of the two parties 18.
Pre-Contractual Information Asymmetrybetween Agent and Principalin
Marketing Management 19. Tackles problems arising from Information
asymmetry between Principal andpotential Agent Occurs prior to
establishing a contractualrelationship The Principal knows: Nature
of tasks Agent must perform Personal characteristics Agent needs to
perform those tasks Problem:How does a Principal establish whether
an Agent has desired traits? 20. Screening potential Agents Observe
sales personnel in action Administer aptitude tests Gain references
from others about Agent Appoint Agent and evaluate performance
later Potential Drawbacks: Adds to costs of acquiring Agents Hiring
wrong Agent leads to unsatisfactoryoutcomes While screening is
costly, it may be efficient compared to costs of a hiring mistake
21. Agent actionSignaling Potential Agent may perform actions
showing heis right for the job Actions must meet criteria of
Individual rationality Incentive compatibility Agent must be (in
the end) better-off than if he/she haddone nothing Potential
Drawbacks Agent may send false signals Signals may not be
clear/strong/precise enoughfor differentiating among Agents 22.
PrincipalActionproviding for Self- Selection: Principal can invite
signals from Agents that maybe available Other choices can be
constructed that inducepotential Agents to apply for consideration
23. The Design ofAppropriate Agent Governance and Control
Mechanisms 24. Possesses some commonality with Hidden Action Model
However narrowly focused on intra-organizational control structures
Concerned primarily with corporate managers,and inducing behavior
consistent with goals offirms stakeholders Assumes Agents are
risk-neutral instead of risk-averse This assumption is also found
in transaction costeconomics 25. This model provides guidance on
Design of compensation plans for marketingexecutives Contingent
compensation plans involving stock oroption plans are effective
Compensation plans with bonuses tied toperformance are effective
These plans motivate executives to behave inaccord with a firms
strategic objectives andpositively related to shareholder wealth
26. Some commonality, and some differences 27. Bothconcepts aid our
understanding ofeconomic organization Both concepts examine
efficiency infunctional relationships Both theories assume actors
are spurredby self-interest and can engage inopportunistic
behaviour Both theories include outside variables(asset
specificity, risk preference) 28. Unit of analysis: TCA uses the
transaction as its unit-- Analysis of how transactions differ
Implications of differences for designing structures These items
get little attention in agency theory Agency theory uses the
individual Agent Impact analysis of differences across different
Agents Emphasis on hidden information model Use of hidden action
model for designing incentives 29. TCAemphasizes ex post
transaction costs arising out of incomplete contracts: Costs in
transactions that are not well-aligned Haggling costs to remedy
misalignments High costs associated with remedying disputes Bonding
costs of securing firm commitments Reducing costs by aligning
transactions with proper governance systems is typical of TCA Newer
work gives more attention to individual agents and crafting
incentives toward trust and commitment 30. AgencyTheory examines ex
ante relations between Principal and Agent: Proposes reducing ex
post costs by ex ante alignment of incentives Agency Theory pays
little attention to costs from incentive maladjustment other than
to allow for realignments to price them out Newer work focuses more
attention on incomplete contract problem, seeks ex ante alignment
of incentives 31. Sales force management,Channel Coordination and
Control,Promotion and Market Signaling 32. SalesManagerSalesperson
link is categorized as an agency relationship: Hiring, Controlling,
Motivating sales personnel areappropriate agency-theory issues
Biggest issue in agency theory: Creating most-appropriate
compensation plans for salespersonnel Salary:Commission ratio lower
in high-uncertainty environment where salesperson is risk-averse
Salary:Commission ratio higher in environments where higher levels
of non-selling activity is needed 33. Compensation systems for
different salesperson career-cycle stages: Early-career, high-risk
sales environments Mid-to-late career, risk-averse sales personnel
Differentcompensation plans for different kinds of selling jobs:
Maintaining existing accounts Prospecting for new business, new
product ideas Hidden Information model may give insights into
better employee selection, training 34. Different reward systems:
Pay plans based on relative performance vs.plans based on absolute
performance measures Job promotions, sliding-scale
commissions,bonuses, group-based incentives Use of mixtures of
incentives Use of different sales channels: Use of sales agents,
manufacturers reps vs.internal sales force Segmentation based on
customer type or range ofproducts used 35. Measurement of:
Environmental uncertainty Risk preferences Separating risk from
other salesperson decisions Reservation utility Impact of
availability of other jobs on salesperson choices Goals and risk
preferences of salespeople Different compensation plans for
different areas of the enterprise 36. Distributionchannel = set of
agencyrelationships Resellers provide: Shelf-space Local
advertising Point-of-purchase promotion Implementation of effective
pricing strategy Allocation of rewards of the relationship can be
problematic, prone to conflict 37. Manufacturerscontrol resellers
with incentives compatible with firms goals: Pricing mechanisms--
Quantity discounts Special transportation or payment terms Two-part
tariffs with fixed franchise fee Constraints on reseller actions
Specific sales territories Resale price maintenance (not legal in
some places) Functional incentives Co-op ads, promotional
allowances 38. Other efficient control methods: Franchising
agreements-- These work best in uncertain environments
wheremonitoring reseller performance is difficult Increase in
margin offered by direct ownership of outletis offset by efficiency
of franchise operator Other mechanisms worth consideration as
channel-partner power grows Better quantity discount schedules can
help partner coordination Allow resellers bargaining opportunities
39. Much previous research work is static Dynamic elements should
be considered to understand appropriate incentives in shifting
conditions Most agency models assume a single Principal Models
should consider competitive issues that occur when many Principals
deal with a single Agent 40. Most Agency Theory models assume
resellers have no power in dealing with Principals Scanners,
computerized inventory management,(and now) the power of Web-based
research toolsgive both resellers and consumers power that isskewed
away from Principals Published work (ca. 1992) had not dealt with
thisshift in power relationships 41. As in Sales Force Management,
there are Channel issues in measurement of: Environmental
uncertainty-- Risk tolerance, separating risk from Agent choices
Reservation utility-- Impact of presence of other options for Agent
choices Goals and risk preferences of Agents-- Different
compensation plans for different territories ormarket segments open
to the reseller Use of secondary data impedes progress of research
efforts, measurements are imprecise 42. Consumers seek data on
alternativebrands when making buying decisions Information comes
from Manufacturers Distributors Retailers, others competing for
customers Crucial question: Are costs and revenues associated with
promotion valid and efficient for signaling differentiated high
quality from lower-quality competitor offers? 43. Agency models
suggest bigger is betterin advertising spending to signal
higher-quality brands Greater ad-spending also supports
higherprices This has been shown to be an efficientsignal of
product quality in worlds with bothhidden information and hidden
actionproblems 44. Pricepremiums can signal product quality when:
Product quality cannot be assessed prior topurchase Prospective
customers are quality-conscious Seller does not have a
well-established reputationfor quality Thiscan be encouragement for
manufacturers to maintain product quality over time 45. Signals of
product quality Many have been examined Full consideration of all
promotional tools availableto marketers is not complete
Combinations of tools may offer value Other potential tools
(variable in value): Extensive warranties (potential hidden
actionproblem inherent here) Consumer promotion with joint branding
Price-Qualitysignals may change over time as information levels
improve 46. Promotionaltools may be useful forshaping future
consumer behavior Agency theory assumptions aboutadvertising
efficiency ignore Perception of brand image Product positioning
...other psychological factors impacting efficient information
transfer (encoding/decoding errors, etc.) 47. As in Sales Force
Management and Channel Control and Coordination... It is
problematic to operationalize and measurethe effects of promotional
tools Product quality measurements, and the validity ofpricing
signals, while important as benchmarks,can be subjective in nature
Objective measurement tools are needed 48. International Marketing:
Cross-cultural issues magnify uncertainty,information asymmetry,
and agent monitoring Research (to 1992) looked only at licensing
anddirect investment issues Industrial Buying Behaviour:
Uncertainty and risk are higher here due to limitednumber of
players and technical informationissues Hidden Information and
Hidden Action issuescan find happy homes here 49. Advertising
Agency Issues: Relationships between firms and advertising agencies
pose a number of agency problems-- Excessive agency turnover
Inadequate screening and selection processes? Poor signals of
agency quality? Disagreements over objectives, development of
conflicting accounts Inefficient incentive and control systems for
agencies Outcome-based evaluation of advertising campaign success
as alternative to traditional commission structure? Another fertile
field for investigation.... 50. Agencytheory seems most useful: In
examining situations with factors unique to thetheory, Where those
factors make contracting-with andcontrolling Agents especially
difficult. Theory is best used where Goal conflict exists between
Principal and Agent Uncertainty is fairly high, triggering
risk-sharing Information asymmetry is substantial Evaluating
performance is difficult 51. As an economic theory, Agency Theory
is relatively simple and dominated by price theory and
self-interest considerations This may not capture all the human
dimensions ofaction and marketing behaviour phenomena There is a
lack of rigourous testing (ca. 1992),which leads to questions about
the theorysvalidity and its general applicability Measurement
issues complicate theseshortcomings 52. Agency Theory problems can
be... Opportunities for market researchers to add to development of
theory Agency-theory constructs are only partial views of the world
combining them with marketing competencies offers potential
enhancements for both Between marketer creativity and applied
measurement expertise, there is potential for improved agency
theory validation 53. Thank Youfor your kind attention.
