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Alternative forms of fit indistribution flexibility strategies

Kangkang Yu and Jack CadeauxSchool of Marketing, University of New South Wales, Sydney, Australia, and

Hua SongSchool of Business, Renmin University of China, Beijing,

People’s of Republic China

Abstract

Purpose – In response to highly volatile and uncertain environments, many firms have implementedflexible strategies and many management researchers have discussed the topic of flexibility. Thepurpose of this paper is to focus on distribution flexibility, the aspect of flexibility related to a

downstream supply chain and to examine the construct of distribution flexibility and howorganisations make strategic choices among different distribution flexibility strategies.

Design/methodology/approach – This work conducts an exploratory multiple case study whichanalyses four Chinese manufacturers from different industries (pharmaceutical, solid/liquidseparation, electric appliances, and clothing).

Findings – The results show that, given different circumstances, firms might choose an appropriatedistribution flexibility strategy (one focused on either physical distribution flexibility, demandmanagement flexibility, coordination flexibility, or on distribution flexibility co-alignment) which fitswith their distribution environment in the contingency theory sense of matching. Furthermore, forimplementation, they fit a given distribution flexibility strategy to both their distribution networksand their distribution performance outcomes in the sense of gestalts or covariance.

Research limitations/implications – This paper has some limitations common to all case studies,such as the limited generalisability of results (since the sample of firms is not statistically significant)

and the potential subjectivity of the analysis.Originality/value – The paper contributes to the existing literature by empirically investigating thedimensions of distribution flexibility, by considering how an organisation develops a distributionflexibility strategy in order to adapt to a particular environment, and by suggesting that finalperformance outcomes may arise through a variety of different distribution flexibility strategies.

Keywords China, Manufacturing industries, Distribution management, Supply chain management,Distribution flexibility, Fit, Focus strategy, Coalignment strategy

Paper type Research paper

IntroductionIn benevolent environments, where a threat does not entail major changes, rigidresponses may be the best course of action for some firms. Such responses refer to the

tendency of organisations toward utilising well-learned or dominant strategies to addressenvironmental disturbances (Fredericks, 2005). However, economic globalisation, thedevelopment of information technology, and the diversification of consumerrequirements increasingly cause enterprises to face highly volatile and uncertainenvironments that arise from short product life cycles and frequent and unpredictablechanges in demand. In such instances, existing routines and procedures may be

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0144-3577.htm

The authors acknowledge financial support from the China Scholarship Council.

Distributioflexibilitstrategie

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Received 14 August 20Revised 15 December 201

18 March 20116 June 20

Accepted 23 September 20

International Journal of Operations

Production Managem

Vol. 32 No. 10, 20

pp. 1199-12

q Emerald Group Publishing Limi

0144-35

DOI 10.1108/014435712112745

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inappropriate to the extent that a mismatch has occurred between organisationalresponses and external demands (Fredericks, 2005). Flexibility, the ability to change orreact to environmental uncertainty with little penalty in time, effort, cost or performance(Upton, 1994), has become increasingly important. Nevertheless, the key problem facing

managers is not an either-or choice between flexibility and rigidity but a systematicdecision about balancing different dimensions of flexibility under differing conditions.

Within the context of a supply chain, flexibility is driven by market dynamism(Van Hoek, 2001). A number of streams of literature discuss this topic in amanufacturing and supply chain context by defining the capability of flexibility asmanufacturing flexibility (Gerwin, 1993; Koste and Malhotra, 1999; Upton, 1994), valuechain flexibility/agility (Swafford et al., 2006; Zhang et al., 2002), supply chainflexibility/agility (Kumar et al., 2006; Lummus et al., 2003; Prater etal.,2001;Sánchez andPérez, 2005; Vickery et al., 1999), logistics flexibility (Zhang et al., 2005) and so on.Although flexibility manifests itself at the lower level of strategy implementationthrough different processes, other theories operate at the higher level of strategicstructural planning for the whole organisation. For example, the organisation theoryand strategic management literatures consider the relations between strategy, structure,and environments and invoke concepts such as fit (Drazin and Van de Ven, 1985;Venkatraman, 1989; Venkatraman and Camillus, 1984), adaptation (Chakravarthy, 1982;Hrebiniak, 1981; Miller and Friesen, 1980) and organisation change (Armenakis andBedeian, 1999; Greenwood and Hinings, 1996). These studies take a systematicperspective but do not examine the flexibility process itself, while studies at a lower levelof analysis focus on process but often confuse flexibility with its sources andperformance outcomes. In contrast, the present research tries to explore flexibilitystrategies in downstream distribution channels based on theories from studies at bothlevels.

The highly volatile and dynamic nature of the contemporary business environment

forces many distributive firms to make adaptations in channel relationships and tomodify the rules of exchange as circumstances change (Sezen and Yilmaz, 2007). Forexample, GREE, the world’s largest specialised air conditioner company, carried out a“Vague Refund Profits Policy” to give a certain percentage of whole year profits todistributors whenever competition caused a dramatic decrease in distributors’ profitsand also implemented an “Off-season Sales Policy” to give refunds of profits todistributors who pay for goods before the arrival of the peak season (Huang et al., 2009).Both reflect their strategic capability to coordinate with distributors flexibly in reaction tochanges in the distribution environment. Even since IKEA’s best selling bookcase “Billy”exceeded the German environmental public policy “E-1 standard”, they have carried outseveral action plans such as highlighting environmentally friendly products in stores,drafting a checklist of how IKEA stores could be environmentally oriented, designing

packaging alternatives to maximise the efficient use of transportation space, andstressing the use of the most efficient transportation mode to reduce the number andvolume of trips, all of which reflect the strategic capability of IKEA to respond flexibly inphysical distribution (Reichert and Larson, 1998). However, it is not clear how suchchoices are made, how to implement them, and what benefits they generate. Furthermore,most studies of flexibility are limited to purely operational issues in the supply chain anddo not specifically address strategic aspects of downstream distribution channels. It is inthis context that we pose our research questions:

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RQ1. What is distribution flexibility, and what are its concrete processes? What areits sources and its performance outcomes?

RQ2. How does an organisation develop a distribution flexibility strategy in order

to adapt to a given distribution environment? RQ3. How do final performance outcomes arise through a variety of different

distribution flexibility strategies?

Literature reviewAs a reaction to increasing uncertainty in the business environment, flexibility became ahot topic in operations management research in the 1980s and 1990s (Gerwin, 1993; Kosteand Malhotra, 1999; Sethi and Sethi, 1990; Slack, 1987; Upton, 1994). A growing body of literature has begun to recognise that it is important to look beyond the flexible factory tothe flexible supply chain (Duclos et al., 2003; Kumar et al., 2006; Sánchez and Pérez, 2005;Vickery et al., 1999; Zhang et al., 2002). In this literature, flexibility arises at an inter-firm

level as well as at the intra-firm level in that supply chain partners share the responsibilityto respond rapidly to customers’ demand at each link of the chain (Kumar et al., 2006).However, only a fewstudies of flexibility considered as drivers of flexibility such situationalfactors as market volatility, product complexity (Bello and Gilliland, 1997), environmentaluncertainty (Swamidass and Newell, 1987; Vickery et al., 1999), or technological complexity(Sánchez and Pérez, 2005). What is less known are the conditions under which flexibility, orexplicitly, each type of flexibility, can enhance a firm’s effectiveness.

According to the contingency theory paradigm, there is no universal set of strategieswhich are optimal for all businesses, and therefore strategies need to be designed forspecific environment contexts. Thus, the present paper takes into account particularenvironmental contexts by using the contingency approach which entails identifyingcommonly recurring settings and observing how different structures, strategies and

behavioural processes fare in each setting (Hambrick, 1983). Contingency analysts strive toidentify whatconstitutes environmental fit and seek to show the effect of fit on performance(Donaldson, 2001). Venkatraman (1989) argued thatin some settings, researchersspecify fitthat is intrinsically connected to specific criterion variables (e.g. fit as profile deviation, fitas mediation, fit as moderation), but in other settings they adopt a criterion-freespecification, which has universal applicability (e.g. fit as matching, fit as gestalts, fit ascovariance). In this study, we try to explore through case analysis the mechanismsunderlying distribution flexibility strategies from a systematic perspective based on thecriterion-free kinds of fit. In contrast, the former criterion-based types of fit require a largerscale survey based data set to capture the various criterion variables systematically.

Fit as matching

The natural selection model posits that environmental factors select those organisationalcharacteristics that best fit the environment (Aldrich, 1971). Using the expression “naturalecological selection”, Aldrich and Pfeffer (1976) emphasise that social organisations aremoving toward a better fit with the environment in a process of organisational changecontrolled by the environment. Fit as matching, either between the environment and thechosen flexibility strategy, or between the network structure and the chosen flexibilitystrategy, reflects the population ecology or natural selection approach to adaptation. Inthis view of fit, organisations enjoy virtually no control over exogenous factors but have


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to match their structures and decision making processes to the demands of their externalenvironments. Therefore, the present study suggests that different types of distributionflexibility strategies fit with specific environmental conditions as matching.

Definition of distribution flexibility. As one dimension of supply chain flexibility,

some researchers define distribution flexibility as the ability to provide widespread orintensive distribution coverage (Sánchez and Pérez, 2005; Vickery et al., 1999). However,this definition has several limitations. First, the notion of flexibility is clearly missing.Flexibility should be defined in terms of the ability to change or react to the environment(Upton, 1994). Although widespread coverage is a potential outcome, it cannot representthe concrete processes or functions of distribution flexibility. Second, the boundary of the phenomenon of distribution flexibility in this definition is vague: it arguably is morereasonable for it to absorb interactive aspects of other dimensions (e.g. productflexibility, volume flexibility, and responsiveness flexibility). Finally, although such adefinition views distribution flexibility as an ability, this definition is too abstractto explain both adaptive and proactive processes of marketing-based flexibility(Claycomb et al., 2005). Based on this analysis, this study defines distribution flexibilityas the ability to change distribution processes in an efficient or effective manner toadjust to requirements of both direct and indirect customers.

Dimensions of distribution flexibility. A supplychain performs a physical function anda market-mediation function (Fisher, 1997), thus, distribution flexibility, as a capabilityembedded in the supply chain, not only involves physical distribution activities(Duclos et al., 2003) which are supply-oriented, but also demand-oriented activities.Zhang et al. (2002, 2005) identified two dimensions of distribution flexibility: physicaldistribution flexibility and demand management flexibility. They defined physicaldistribution flexibility as the ability of a firm to quickly and effectively adjust theinventory, packaging, warehousing, and transportation of physical products to meetcustomer needs, while demand management flexibility is the ability of a firm to quickly

and effectively respond to the variety of customer needs for service, delivery time, andprice. In addition, a third dimension, coordination flexibility refers to the development of relationship management processes between partners through integrative capabilities(Achrol, 1997; Heide and John, 1992; Sezen and Yilmaz, 2007). A company has a choiceabout whether to focus on one dimension or to combine all three together, thus yieldingfour implicit types of strategies: a strategy focused on physical distribution flexibility,a strategy focused on demand management flexibility, a strategy focused on coordinationflexibility, and, finally, a strategy of distribution flexibility coalignment. The keyobjectives of this paper are to interpret how firms choose strategies under various kinds of environmental conditions and to understand how they implement chosen strategies.

Fit as gestalts or covariance

When fit is conceptualised and specified using only two variables, it is possible to invokealternate perspectives that have precise functional forms, but when many variables areused, it is necessary to identify a gestalt mechanism (Venkatraman, 1989). A gestaltmechanism here assumes that different kinds of distribution flexibility pose conflictingfunctional demands. This condition predicts that focal firms which attempt tosimultaneously satisfy all functional demands will perform poorly. Therefore, once a focalorganisation chooses a focused strategy of distribution flexibility, a network structure canbe designed to maximise such flexibility, and the internal consistency of each choice will

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lead to relatively better distribution performance. Such a perspective conceptualisesstrategy as the combination (profile) of environmental, contextual, and structural elementsaffecting an organisation at any time when the congruence of environmental, contextual,and structural complexity increase (Venkatraman and Camillus, 1984).

Fit as covariation depicts a pattern of covariation or internal consistency among a set of underlying theoretically related variables (Venkatraman, 1989). In contrast to the logic of fit as gestalts, fit as covariation implies that different kinds of distribution flexibility arefunctional demands that are not in conflict but rather act synergistically. Therefore, thecovariation among the three components of distribution flexibility will lead to superiorperformance. However, the degree of specification of the functional form determines thedifference between fit as covariation and fit as gestalts. If the resources or capabilitiesrequired are critical and scarce, the degree of conflict in the three different dimensions willbe very high and they will fit as gestalts. In such a situation, the focal firm should use alarge proportion of its limited resources or capabilities to focus on only one dimension andput less emphasis on the other two. In contrast, if the resources or capabilities required aredifferent and easy to access, the degree of conflict will be very low and the dimensions willexhibit fit as covariation. The degree to which firms favour one strategy over anotherdepends on environmental conditions. Whether they have sufficient resources toimplement the strategy depends on their network structure and performance orientation.

Network sources of distribution flexibility. Compared to manufacturing flexibility,flexibility in the supply chain entails the implicit requirement of flexibility within andbetween all partners in the chain (Duclos et al., 2003). This view regards sources of supply chain flexibility as not simply constrained to intra-organizational phenomena.For example, Stevenson and Spring (2007) recognize both a robust network and supplychain relationships as important components of a flexible supply chain. However, weargue that contracts requiring flexible procurement, in themselves, constitute only oneaspect of a process of flexibility, and relationship duration, in itself, is arguably a long

run output; thus, only the design of the network structure, itself, is a true source of flexibility. The reason is that resources can be seized, delivered, and used from strategicnetworks, a process in which different kinds of capabilities can be formed. Morespecifically, through collaborations with other firms in the industry, a firm involves itself in an inter-firm network that contains useful information and resource flows (Echols andTsai, 2005). Thus, network resources represent the informational advantages associatedwith a firm’s network of ties in which both relational and structural embeddedness areimportant dimensions for analysis in network theories (Gulati, 1998).

Performance of distribution flexibility. Distribution channel systems exist and remainviable through time by performing duties that reduce end-users’ search, waiting time,storage, and other costs, which Bucklin (1966) collectively calls the service outputs of thechannel. Some of these dimensions focus on efficiency such as timeliness and

availability, while others may emphasize effectiveness such as product appropriateness(Bienstock et al., 1997). In the long-term, higher customer loyalty will reduce the need tofind new customers and instead allow effort to focus on retaining existing customers.Therefore, to the extent that customer retention is less costly than customer acquisition,a focal firm’s goal of higher marketing efficiency is partially achieved by enhancing theoperational quality so as to make existing customer satisfied, thus contributing tolong-term loyalty. Another long-term indicator, link duration, measures the amountof experience that the supplier and the buyer have in dealing with each other


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(Levinthal and Fichman, 1988). To the extent that it yields long-term revenue streams, itis an effectiveness outcome. However, these dimensions involve substantial tradeoffs.Donaldson (1984) claims that good performance on one dimension often meanssacrificing performance on another, so no single strategy can be expected to perform

well on all dimensions. Accordingly, different types of flexibility strategy are alsoexpected to perform differently on distinct performance dimensions.

Case study methodThe overall objective of this research is to build and validate theory about distributionflexibility strategies to the extent that there are few studies in this area and there is noaccepted framework for analysing distribution flexibility. Due to the exploratory natureof this paper, we adopt the case study method recommended by Yin (1984) andEisenhardt (1989). Case studies have a distinct advantage when a “how” or “why”question is being asked about “a contemporary set of events over which the investigatorhas little or no control” (Yin, 1994, p. 4). Thus, the case study method seems appropriateto obtain an in depth knowledge of distribution flexibility and to explore how firmsmake and implement a variety of different distribution flexibility strategies.

Sample selectionAs we want to compare the differential challenges and responses in multiple firms, wedevelop a multi-site study (Creswell, 1998). The studies of each site instrumentally focus onthe same issue, so we use purposeful sampling to explore the differing environmentalconditions (Stake, 1995). We select manufacturing firms basedon differentflexibility driversor reasons why flexibility exists in different situations (Jack and Raturi, 2002). These arerelated to uncertainty to the extent that flexibility is a fundamental reaction to uncertainty(Gerwin, 1993; Swamidass and Newell, 1987; Vickery et al., 1999). Broadly speaking, thereare two core sources of environmental uncertainty: homogeneity and stability (Thompson,

1967).Duncan(1972) suggests that thenumberof customers, suppliers, andcompetitors thata firm may face is an indicator of homogeneity while the rate of change in such numbers isan indicator of stability. From a similar perspective, Nonaka and Nicosia (1979) make use of two dimensions: certainty-uncertainty and homogeneity-heterogeneity to define theinformation generated by the markets faced by a seller.

In this study, we analyse four manufacturing firms that represent differentflexibility drivers so as to reflect a cross-classification among levels of two dimensions:

(1) The level of uncertainty, including such questions as “In the last five years,have there ever been any changes in customer demand?” “Have there ever beenany changes in competitive activity?” and “Have there ever been any changes of production technology in your industry?”

(2) The level of heterogeneity including such questions as “How many differentcategories of this product exist?” “Do you think the range is wide enough for mostof your end customers?” and “Is there any segmentation of your end customers?”

Table I profiles these four firms in terms of their distribution environment.Company P manufactures mainly men’s wear with world class production lines and

auxiliary equipment. Althoughthey are still at an early stage of development, their growthrate is dramatic, at over 700 percent in 2006. Now they have around 1,000 employees and30 million RMB in annual sales. Their products are mainly sold in Shandong province,

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where the market is very stable. Suits are their main products and men’s suit styles inChina have not changed much for many years. Thus, Company P is in a relatively stableand homogeneous environment.

Company Z is a professional filter press manufacturer with leading-edge technologyand a wide range of products. They have established 12 branches, around 150 salesoffices, more than 1,300 agents, and above 1.5 billion RMB annual sales revenue. A fewyears ago, their market in the coal washing industry had been shrinking and expanding

to many other industries connected with solid/liquid separation, which accelerates theupgrading of products from small size to large size and energy-efficient types.Furthermore, prices fluctuate rapidly because of lack of differentiation amongcompetitors. As a result, Company Z’s profit fell by 10-20 percent between 2008 and 2009.Thus, although their environment is relatively homogeneous, it is also uncertain.

Company Q, one leading pharmaceutical company in China, manufactures qualityand affordable generic drugs. They nowhave more than 6,000 employees and6-10 billionRMB annual value production. In 2009, they were chosen as one of the tenpharmaceutical companies with the largest growth potential in China. They alreadyhave three product lines and more than 200 categories of products. The customerdemand for most categories has not changed very much in recent years. Although thenumber of companies producing similar categories of products is increasing, the number

of strong competitors is very limited. Most products available are generic drugs and theprocess of R&D is very arduous, lasting from five to seven years. Thus, previousproducts remain on the market for a long time.

Company J invented the Automatic Soymilk Maker and engaged mainly in thehealth-oriented household appliances industry. Their average growth rate has kept above40 percent in the most recent five years and the market share of their soymilk maker hasexceeded 80 percent.They already have 450 first level distributors, more than 20,000retailoutlets, and 4.3 billion RMB total revenue in 2008. In addition, Company J has entered

Company P Company Z Company Q Company J

Uncertainty Low High Low HighDemand

Preferences for product features e O e ODemand volume e O – O

CompetitionNumber and quality of competitors e e e OStrategies of competitors e O e O

TechnologyManufacturing technology O O e eProduct development e O e O

Heterogeneity Low Low High HighProduct

Category of existing products f f P PCustomer

Number of customer segmentation f f P P

Variability of customer demand f P

– P

Notes: “O” indicates evidence of uncertainty; “e” indicates evidence of certainty; “P” indicatesevidence of heterogeneity; “f” indicates evidence of homogeneity; “–” indicates no evidence

TableBusiness backgroun


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more than ten other small household appliance categories. In 2008, after the so-called“Poison Milk” incident, the market for the soymilk maker became even more intenselycompetitive. Therefore, the environment of Company J is not only heterogeneous but isalso quite uncertain.

Evidence collectionTo maintain data consistency and improve richness in detail, we use a semi-structuredinterview approach (Yin, 1994). In each firm, the key informant participated in a one and ahalf hour interview. Qualified key informants ranged from middle managers and seniormanagers to presidents/vice presidents all of whom must meet the following requirements:

. have much experience in dealing with channel management or working with thedownstream distributors/direct customers;

. be quite knowledgeable of operations and distribution channel management; and

. be involved in the distribution decision making process and hold opinions thatare representative of the organization or business unit as a whole.

The interview involves questions about the structure of distribution channel, flexibilityin distribution activities, and performance (see the Appendix). The interviews wereconducted between December 2009 and January 2010. In order to increase the reliabilityof the case analysis, we use an interview protocol and develop a case study database asrecommended by Yin (1994). The transcripts of the records were first sent back tointerviewees for accuracy, coded and checked for credibility, and subsequently auditedby other researchers to establish dependability and conformability (Lincoln and Guba,1985). In addition, multiple sources of evidence such as industry databases, productcatalogues, company magazines, web sites, and brochures were used to help establishconvergent validity (Yin, 1994).

Case analysis and resultsA staggering volume of data in a case study drives within-case analysis and the overallidea is to become intimately familiar with each case as a stand-alone entity (Eisenhardt,1989). Therefore, the first step of analysis involves preparing detailed case studywrite-ups for each site in order to understand the unique pattern of each case. Then,cross-case analysis looks for patterns that can help categorise the sample cases intosubgroups based on within-group similarities coupled with intergroup differences.Finally, several typologies are constructed to explain the underlying fit mechanisms.

Fit as matching According to the literature review, fit as matching is a condition in which strategic choiceis low and environmental determinism is high (Hrebiniak and Joyce, 1985). That meansthat an organisation can survive the conditionsof its environment by adapting itsstrategyto cope with changes in the external environment. Based on this theory, we analyse howthe four companies in this study fit their different kinds of distribution flexibility strategywith their specific distribution environment from a matching perspective. The followingpassages first discuss how each dimension of distribution flexibility is manifested ineach company and then make working propositions using contingency theory.

Physical distribution flexibility. Physical distribution management involves activitiessuch as transportation planning and management, facility structure management

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(e.g. warehouse location), inventory management, material handling (e.g. packaging andloading), reverse logistics, tracking, and delivery (Duclos et al., 2003; Williamson et al.,1990). Also, based on the definition of Zhang etal. (2002), the present paper suggests thatphysical distribution flexibility involves changing manufacturing, delivery, logistics

and other operating processes to respond in an efficient manner to varying requirementsof both direct and indirect customers. Guided by conventional studies of manufacturingflexibility and logistics adaptability, we analysed the changes that take place in themanufacturing and logistics strategies in each company and found these to be concernedwith physical distribution flexibility as manifested in manufacturing, transportation,storage, and inventory.

Company P shows some evidence of physical distribution flexibility, particularly interms of volume flexibility, the ability to effectively increase or decrease aggregateproduction (Cleveland et al., 1989). For example, in off seasons, there is a workshopspecifically dealing with foreign orders to accommodate a strict time schedule. Theirdelivery strategy is also quite unique in that 50 delivery cars not only serve fixed retailstores but also collect dirty suits for dry cleaning when there are no new products, thus

adjusting delivery requirements to meet the expectations of individual customers. Usingenterprise resource planning (ERP) systems, Company P can transfer stock betweendifferent areas to avoid a large quantity of stock in any one area, which enhancesefficient deployment of inventory and quick inventory replenishment.

Company Z also shows much more evidence of flexibility in manufacturing andlogistics. With more and more rigorous environment policies, demands for product sizesand press rates are changing. In 2009, Company Z stopped producing machines of smallsizes and gave priority to large sizes. Furthermore, they developed a quick-drawmachine and also changed the washing method from a vertical type to a frame type inresponse to customers’ new demands for higher efficiency and energy savings. Theseare manifestations of product flexibility as defined by Vickery et al. (1997). With changes

in product size, the transportation tools of Company Z also changed from small vehiclesto large ones, showing a capability to vary transportation carriers (Lummus et al., 2003).Furthermore, the interviewee also explained the way that Company Z tried to controlinventory to an acceptable level:

When material prices fluctuate dramatically, we will bring forward enough inventories. If thefluctuation is not so big, we will transfer inventory to external logistics companies (Mr Zhang,Marketing Manager, Company Z).

This remark depicts a capability to adjust inventory by enlarging volume or outsourcingin response to procurement uncertainties.

Company Q’s manufacturing process is somewhat rigid compared with the othercompanies as suggested by an interviewee who said that:

If the material price is increasing, we will try to ensure normal operation of the originalproduct lines. Unless it is absolutely necessary, we will not choose to stop producing.Sometimes we decide to retain a market even when there is no profit in the belief that thefluctuation is temporary (Mr Tian, Marketing Manager, Company Q).

Furthermore, Company Q thought that there are still financial risks in storing too muchmaterial when material prices are low, so instead they often consider simply managingdemand by increasing the price of their product to their downstream customers whoaccept it within limits.


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Company J is similar to Company Z in that it has a high level of physical distributionflexibility. They increased investment in R&D continuously (to 88.53 million RMB in2008, an increase of 129.54 percent) and led one major technology evolution every twoyears, which constitutes a high level of launch flexibility, the ability to rapidly introduce

many new products and product varieties (Sánchez and Pérez, 2005). Company J canadjust product lines and produce a “Fighter” periodically which has a high priceperformance ratio to gain market share quickly. This is a special case of modificationflexibility, the ability to effectively implement minor changes in current products inreaction to complex situations of market competition (Pagell and Krause, 2004). On thearrival of the busy season, the logistics department of Company J carried out plans todeliver the right goods on time. If orders arrive late, they will work overtime; and if urgentorders arrive, they will track the entire journey of a shipment. This constitutes highdelivery flexibility (Sánchez and Pérez, 2005). Also, the warehouse managementdepartment will start planning methods to adjust storage capacity such as rentingexternal warehouses, updating machines, and increasing the number of barcode scanners.

Demand management flexibility. Demand management flexibility is a form of marketing-based flexibility and can be defined as the responsiveness to changingmarket conditions and changing customer needs and wants (Duclos et al., 2003).However, different from ongoing marketing policies, demand management flexibility isan information-intensive and market-sensing capability that entails quick adjustmentsof original processes under a given circumstance (Zhang et al., 2002). This papersuggests that demand management flexibility involves changing assortment,promotion, after-sale services and other marketing processes in an effective mannerto adjust to varying responses of both direct and indirect customers to products/servicesquality, prices and discounts, promotion, assortment, and involvement in intangibleservices. Several aspects of marketing-based flexibility that arise in the cases includeflexibility in assortment and order fulfilment, customer services, price, and promotion.

Both Company P and Company Z are somewhat rigid in marketing activities. Forexample, their services, such as the custom-tailored service for special body sizes and thegroup orders that Company P provides and the commitment to offer free after-saleservices for the entire year made by Company Z, are common to other competitors. Also,the price strategies of Company P and Company Z are less flexible than those of othercompanies. For example, the price given to either distributors or branches is fixed byCompany Z’s headquarters. In terms of order fulfilment, Company P sometimes maydelay domestic orders for a short time within the contract, but they never delay ordersfrom overseas to balance the fulfilment schedule. For Company Z, if an order is delayed,they will first communicate with customers and then try to coordinate with other ordersto ensure that the goods arrive on time.

Company Q, in contrast, shows considerable evidence of high demand management

flexibility. Although the products of Company Q are rarely sold together, sometimesthey give free goods allowances by offering free of charge a certain product to thosedealers who achieve good sales performance. However, the percentage of the volume,thecategory of the products, and the performance criterion are not fixed as a promotionreward but implemented quite flexibly and only when dealers reach satisfactory sales.In addition, if one product sells very well, Company Q will promote another new productto agents by using their original network. When the products of Company Q areadopted by a hospital, they offer support including participating in academic activities

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such as conferences, giving free documents to academics, and offering brokerage, all of which show their capability to offer flexible services to direct or indirect customers.Company Q also changes sales policies with price fluctuations. The interviewee of Company Q illustrated that:

We fixed a price of 800 RMB each unit (of a drug). But later, other competitors were on themarket and their prices were at about 500 RMB each unit, so we will follow. When we joined

in bidding, the price dropped to 300 RMB each unit. So we had to adjust this price to 100 RMBeach unit or agents would have no profits (Mr Tian, Marketing Manager, Company Q).

This example reveals the capability of Company Q to adjust prices quickly under acondition of highly uncertain competition.

Company J, which has a strong ability to change marketing processes, is in a similarcondition. In 2008, many small household appliance producers entered into the hotmarket of the soymilk maker. Thus, Company J could not rely only on its earlypromotionof soymilk as a traditional drink, so they decided to change their marketing strategy.The Company J interviewee noted that:

We have a big soybean production base in Heilongjiang and send soybeans to the processingbase in Shandong [. . .]. At the early stage, we put some soybeans as a trial in the package of

soybean makers, and now customers can also buy soybeans separately in “5 Star” stores(Miss Han, Public Relations Manager, Company J).

Company J also tried to enhance the level of customer service such as by offering “ThreeFree” service nationwide and establishing a spare parts management department. Inpromotion, they increased investment in advertisements, established health clubs, andproposed an idea of “billions of cups of soybean milk free drinking”. All of theserepresent the capability of Company J to sense long-term trends in their market area andto frequently adjust their selling practices (Kumar et al., 1992).

Coordination flexibility. Coordination flexibility involves changing relationshipmanagement processes in a long-term oriented manner to adjust to customer demands.Many studies in marketing connect flexibility to relational norms and suggest that therelationship will be subject to modification in the light of changed circumstances (Heideand John, 1992; Sezen and Yilmaz, 2007). This is flexibility in relationship content, whichis a bilateral expectation to be able to make adjustments in an ongoing agreement abouta relationship. However, other studies are also concerned with the structure of relations.For example, Stevenson and Spring (2007) suggest that it is recognised as important tobe able to re-configure and re-invent a structure as needs change, providing a moredynamic and evolutionary means of being flexible. Thus, flexibility in relationshipstructure is the capability to change the number of partners or relation levels such asfrom arms-length to strategic alliance.

Company P has a high level of coordination flexibility. Although the sales of stores indifferent districts are calculated separately and generally they are forbidden to dobusiness across districts, sometimes when there are large or group orders which arequite hard for a single store to handle the headquarters would allow several stores tocooperate to fulfil the orders. In addition, Company P has tried to enlarge its distributionnetwork. For example, the retail stores of Company P in prefecture-level cities representthe Company P brand image and help in establishing a good reputation, but these storesmay not gain profitable business, so Company P has tried to add new franchisees


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in county-level cities and even allows managers of high performance stores to open newstores in other places by themselves.

Similarly, Company Q and Company Z also show evidence of flexibility in theirrelationships. When agents meet with difficulties, Company Q will help agents to deal

with them even though this is not included in the contract. Company Z also tried theirbest to support their distributors. The interviewees from both companies gave examplesas follows:

When agents join in the bidding, some products are easy to deal with, while some are veryhard, so we will support them. If they need us to give a price concession, we will do this tohelp them win the bid (Mr Tian, Marketing Manager, Company Q).

For distributors, we offer supports like welcoming customers, showing them around thefactory and giving gifts to them [. . .]. If they require more, we will try to offer more, eithermore spare parts or more gifts (Mr Zhang, Marketing Manager, Company Z).

Company Z also wants to develop more distributors not only in the mature coal

washing industry but also in other new areas such as chemical engineering, sugarmanufacturing, and titanium white. The Company Z interviewee observed that:

XX Co. Ltd which sells environmental equipment used our products before and knows thisenvironmental protection industry very well. Hence, we gave the dealership in Guangdongprovince to this company (Mr Zhang, Marketing Manager, Company Z).

This example illustrates a very special way in which some customers may be transformedinto distributors to the extent that they may have more experiences and relations than thefocal firm does in a new untapped market.

Quite differently, Company J established very complex distribution channels. On onehand, they signed formal strategic alliance contracts with many big retailers; on theother hand, they have very strict standards for the “5 Star” stores and other agents and

inspect their operations and training managers regularly. Through these regulationsand formal contracts, Company J kept very strong mutually beneficial relations with alldistribution channel members. In addition, Company J planned to add 6,000 retailers andestablish more than 800 “5 Star” stores in the coming two to three years in order toexpand their existing distribution network.

Environment and flexibility strategy. Based on the analysis of distribution flexibilityin each company, we compared these four companies in terms of each dimension of distribution flexibility. As is shown in Table II, arguably, Company P focused oncoordination flexibility; Company Z had a high level of physical distribution flexibility;Company Q had a high level of demand management flexibility; while Company J isspecial in that it achieved high levels of all three dimensions of distribution flexibility.Using contingency theory, the following passages construct propositions of fit as

matching between the environment and the strategy chosen by the company.Company P, which is in a stable and homogeneous environment, focuses on its flexible

relationship with its stores and franchisees. They are able to change relationship content(e.g. allow stores to cooperate among themselves for large orders) and relationshipstructure (e.g. allow store managers the right to open new stores), which suggests a highlevel of coordination flexibility. But their capability to change activities related tomanufacturing, logistics and marketing is much weaker, which suggests an average levelof physical distribution flexibility and a lower level of demand management flexibility.

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These observations imply that Company P survives and prospers in a stable andhomogeneous environment by implementing a systematic strategy that combines a highlevel of coordination flexibility, an average level of physical distribution flexibility and alow level of demand management flexibility.

Company Z is in an environment with a relatively higher level of uncertainty but alower level of heterogeneity. They have strong capabilities to increase frequencies of newproduct introductions, adjust delivery capacity, change delivery modes when necessary,and adjust storage capacity. These capabilities constitute a high level of physicaldistribution flexibility. However, for marketing activities, their approach is more rigidthan flexible. For example, Company Z try their best to ensure the orders arrive on time,give a fixed price to their agents, and for many years have offered the same service tocustomers as have other competitors. Thus, the level of demand management flexibilityis lower for CompanyZ compared to the other three companies. These observations implythat Company Z survives and prospers in an uncertain but homogeneous environment byimplementing a systematic strategy that combines a high level of physical distributionflexibility, an average level of coordination flexibility and a low level of demandmanagement flexibility.

In contrast, Company Q, which is in a stable but heterogeneous environment, investsmore in its capability to adjust marketing rather than operational activities. For example,they adjust prices and allowances according to competitors’ strategies and offer a varietyof services to direct or indirect customers. But they try to maintain a steady productionlevel for their product lines and rarely maintain buffer stocks when prices are low, whichtogether suggest that they are satisfied with a lower level of physical distributionflexibility. These observations imply that Company Q survives and prospers in a stablebut heterogeneous environment by implementing a systematic strategy that combines

Company P Company Z Company Q Company J

Physical distribution flexibility Average High Low HighManufacturing

Production volume/category † † W †New product development – † W †

Delivery and transportationTransportation tool W † – – Delivery volume/quality † – – †

Storage and inventoryInventory deployment † † W †Inventory volume † † W †

Demand management flexibility Low Low High HighAssortment and order fulfilment W W † †Customer service W W † †Price and promotion W W † †

Coordination flexibility High Average Average High

Relationship content † † † †

Relationship structureNumber of members † – – †Level of members † † † †

Notes: “†” evidence of flexibility; “W” evidence of rigidity; “–” no evidence

Table ILevel of distributio

flexibility in foucompani


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a high level of demand management flexibility, an average level of coordinationflexibility and a low level of physical distribution flexibility.

Finally, Company J, which lies in an environment that is both heterogeneous anduncertain, is flexible in almost all aspects of distribution strategy. On one hand, they

make adjustments to manufacturing and logistics activities (for example, by investingmore in R&D and reducing product development cycle time, by carrying out plans todeliver the right product on time in peak demand periods, by maintaining efficientinventory deployment, and by replenishing inventory quickly). On the other hand, theyalso can flexibly change marketing activities. For example, they try to enhance the levelof customer services and increase investments in promotion activities when competitionintensifies. However, the coordination flexibility of Company J is more complex. For theirbig retailers, their level of flexibility in relationship content is high, while the level of flexibility in relationship structure is fairly low. In contrast, for “5 Star” stores and otheragents, they have a high level of flexibility in relationship structure but a lower level of flexibility in relationship content. These observations imply that Company J survivesand prospers in an uncertain and heterogeneous environment by implementing a

systematic strategy that combines a high level of demand management flexibility,physical distribution flexibility and coordination flexibility.

Fit as gestalts or covarianceThe basic assumption of fit as gestalts is that organisations face conflicting functionaldemands and have a great deal of structural latitude. The problem of conflicting functionsstill persists, but differing configurations of multiple function and structure variables willbe equally high performing. In effect, organisations will differentiate themselves fromeach other, both structurally and functionally, by forming niches in which they cansucceed (Gresov and Drazin, 1997). In contrast, fit as covariance is the condition whenfunctional demands are not in conflict but rather act synergistically and the coalignment

among them leads to superior performance. The differences become clearer whenanalysing different distribution flexibility strategies together with the correspondingnetwork sources and performance orientations.

Network sources of distribution flexibility. Based on general network theories, twoimportant dimensions for analysing distribution networks include:

(1) relational embeddedness which includes strong ties and weak ties; and

(2) structural embeddedness which includes both dense ties and structural holes.

Structural embeddedness goes beyond the immediate ties of firms and emphasises theinformational value of the structural position each node occupies in a network (Gulati,1998). An operationalisation of density for a finite portion of a network or “partial”network is simply the ratio of the total number of actual ties to the total number of

possible relationships in that partial network (Boissevain, 1974). Thus, density,D ¼ [2Na/N(N 2 1)] where Na – actual number of ties,excluding thoseof the subject andN – the total number of others in the partial network (Cadeaux, 1997). To analyse thenetwork density of each case, we also considered the ratio of existing linkages betweenthe focal firm and its distribution channel members to potential linkages between thefocal firm’s competitors and its distribution channel members.

Figures 1-4 show the distribution network structure of each company.Company P uses two to three stores at each prefecture-level and additional franchisees

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in county-level cities. There are six regional managers, each of whom takes charge of 30 franchisees, the total number of which is less than 200. Company Z uses the model of direct sales (85 percent) combined with distributors (15 percent). There are 12 salesbranches, more than 150 sales offices, and more than 1,000 distributors, so the number of existing linkages is quite large. Company Q simultaneously uses two network modelswhere one half of sales go through a self-support team and the other half through agents.There are only three to four agents for each product in one province and all dealexclusively in Company Q’s products. Therefore, comparing the actual number of ties(Na ), Company Z is the largest, while Company P and Company Q are quite close(NaZ . NaP < NaQ ). However, Company Z has only two strong competitors who mayhave equivalent power to establish linkages with their distributors who are forbidden tosell across regions, thus the number of potential linkages is very small. However, either

Company P or Company Q is in a more competitive industry, while stores of CompanyP have territorial exclusivity and territorial restrictions to the local market. Thus, for thenumber of potential linkages (N),Company Q is the largest and Company P isthe smallest(NZ , NP , NQ ). Since density, D ¼ [2Na/N(N 2 1)], DZ . DP . DQ. Finally, thenetwork structure of Company J is very complex. They now have 450 first leveldistributors, 8,000 retailers and also a key account (KA) department for nine big retailers.Here the small distributors’ network is relatively dense, while the big retailers’ network isrelatively sparse.

Figure Distribution network

Company

Headquarters

Marketing

department

Store

Customers

Franchise

Sales

manager

6 regions

30

City/town CountyGroup

order


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Relational embeddedness stresses the role of direct cohesive ties as amechanism for gaining fine-grained information (Gulati, 1998). Much of the earlyresearch on tie strengths draws on Granovetter’s (1973) conceptualisation of ties with afocus on information flows among individuals. Recent studies in a strategic networkcontext associate strong ties with trust, fine-grained information exchange and jointproblem-solving arrangements (Tiwana, 2008; Uzzi, 1997). In contrast, weak ties involverelatively infrequent interaction between the focal actor and contacts(Granovetter, 1973).

For Company P, a conference for the placement of orders is held twice a year,while training sessions are unscheduled. When the off-season comes, all sales managersare gathered for sales training to help them display products and guide their salesefforts. They are also offered significant support to their stores or franchisees, forexample:

Managers pay 100000 RMB and then goods valued at 200000 RMB are supplied for an initialstock [. . .]. We choose location, design storefronts, and make advertising plans [. . .]. 70% of first year expenses are reimbursed (Mr Liu, Regional Marketing Manager, Company P).

The relationship between Company Z and their distribution channel members is verystrong. They have frequent communication in many ways as reflected in remarks such as:

Figure 2.Network of Company Z

Headquarters

Regional

manager A Distributor A

Downstream

distributors

Customers

City manager

15%85%

Marketingdepartment

More than

150 offices

More than1000

distributors

12 sales

branches

Businessman

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A regional manager meeting is held each month which analyses sales conditions and sets thenext period plans. These managers also go around and communicate with each regionperiodically [. . .]. There are also non-periodic meetings when problems arise in branches andthen we will send managers to deal with them (Mr Zhang, Marketing Manager, Company Z).

Company Z also shares important information with their members, for example:

Many customers connect with us directly. When they call our marketing department, we willsend customer information back to regional branches who will then contact with customers(Mr Zhang, Marketing Manager, Company Z).

Furthermore, there is high reciprocity between Company Z and their distribution channelmembers as the interviewee observed that:

There are several levels of amounts (of discount for big contracts). If the contract is 5 million,we will reduce the initial price by 5% (for agents). If the contract is 10 million, we will thenreduce the initial price by 10% (for agents) [. . .] (Mr Zhang, Marketing Manager, Company Z).

However, Company Q’s connection with distributors is somewhat weaker. They havemore academic meetings in which experts present information about new drugs,

Figure Distribution network

Company

P r o

v i c e

Headquarters

Self-support

manager

Agent

manager

Agent A

Downstream

distributors

Hospital

A\B\C drugs D\E\F drugs

3-4

Self-support

team

50%50%

Key account


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which is an important method of promotion to customers rather than means of communication with agents. In fact, Company Q rarely gathers all the agents in one

meeting as regional price policies are different. In addition, they only use relatively formalmechanisms to manage key agents such as formal contracts to limit the region, quota, and

the time of promotion and sale for each drug.Finally, the situation in Company J is complex. They have a dealer conference every

year to evaluate their performance and set goals and also have a new product promotionconference including gatherings for sharing experiences among distributors. In addition,

regional and city managers hold meetings of distributors periodically, while sometimesthere are also joint problem-solving mechanisms, for example:

For big events, managers in the marketing department, key account department, and

marketing management department will form teams to work with front line dealers

Figure 4.Distribution network of Company J

Headquarters

Regional

manager

Customers

City manager

Marketing

department

More than 20,000retailers

450 first leveldistributors

KA

department

Dealer

(single-stop type)

Downstreamdistributors

Big retailer

270 cities

Region

5S store

(Pre&after

sales)

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in five districts. We communicate and solve problems with dealers such as newproduct supply, special point of purchase supply, and retailers’ resource investment, etc.(Mr Lv, Marketing Manager, Company J).

However, for large retailers, Company J signed formal strategic alliance contracts andtheir meetings were not held as frequently as they would be at so-called “5 Star” stores orsmall distributors. In fact, purchasing managers of large retailers only occasionally paya visit to headquarters.

Performance of distribution flexibility. According to the analysis of strategicoutcomesdiscussed in the literature review, there are different kinds of distribution performance interms of either short- or long-term performance, efficiency or effectiveness. In the casestudies, we also found that the four companies are oriented to different distributionperformance outcomes.

Company P, a men’s wear manufacturer, is long-term oriented. Their sales growth, ata rate of 708.9 percent in 2006, is remarkable, but still they are at an early volume stagecompared with other large competitors. One of their important goals in the short term is

to promote their brand image nationwide and establish a good reputation in the existingmarket. To achieve this goal, they have opened two to three large stores inprefecture-level cities even though these stores may not be profitable. They even provideafter-sales service consisting of free dry cleaning throughout the life of the garment,a very unusual practice in this industry. This service builds loyalty and supports retailsales. They maintain very good relationships with their stores or franchisees. Theinterviewee of Company P illustrated that:

Mortality is very low. The cooperation with franchisees can be very long and many(relationships) are about 6-7 years. From 2002 when the company was established up to now,60%-70% stores are operated by their original managers (Mr Liu, Regional MarketingManager, Company P).

Company Z, a filter press manufacturer, is efficiency oriented. It evaluates distributionchannel performance according to three criteria: contracted sales, delivery capacity, andnet revenue, which should be above 90 percent. Company Z’s channel membersatisfactionis not strong. Company Z has conflicts with their channel members from beginning to end.For example, the interviewee explained that:

Distributors always complain that our price is high, service is poor and few rewards are given[. . .]. To the manufacturer [Company Z], they always say that the price is too high, while tocustomers they will expend more effort and cost to get orders (Mr Zhang, MarketingManager, Company Z).

This scenarioexplains why Company Z emphasises loyalty of their distributors. CompanyZ would like to give their distributors a better margin and intends to shield important

industry information from distributors’ competitors. Unless it performs very badly,Company Z will not replace an agent with a new one.

Company Q, in the pharmaceutical industry, is effectiveness rather than efficiencyoriented. Despite quantitative targets for their agents, Company Q also has some softperformance goals such as capability and frequency of academic promotions. CompanyQ dealt with complaints from agents very well. The interviewee noted that:

The team (a dealer management team) not only supervises the agents but also serves them askey accounts [. . .]. The better the performance of the agents, the higher will be the income


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of the team [. . .]. So the team will try their best to reflect problems of agents (Mr Tian,Marketing Manager, Company Q).

Thus, agents would like to cooperate with Company Q for a long time and the relationsare usually developed steadily.

Company J, in the household appliances industry, is short-term oriented. That is not tosay that Company J has not considered long-term development as they never stopacquiring new distributors and cooperating with big retailers to strengthen theirdistribution network, but at this stage, when their biggest market, the soymilk makermarket, was attacked by many strong competitors, they have focused more on short-termefficiency and effectiveness outcomes. In 2007, they implemented an ERP project in orderto reduce costs and enhance efficiency and accuracy of delivery. At present, theirafter-saleservice networkhas been the source of their competitiveness. In 2009, they werechosen as “Excellent After-sale Service Company”. Furthermore, they have investedheavily in “5 Star” store construction, established strategic alliances with several bigretailers, and won the “Leap Achievement Prize” from Wal-Mart in 2008. They also

planned to add 6,000 retailers and 800 “5 Star” stores in the next two to three years. Network, flexibility strategy and performance. As is referred to the literature review,the position of fit as covariance within the contingency theory classificatory frameworkdiffers from the position of fit as gestalts only in relation to the degree of specification of the functional form (Venkatraman, 1989). The resources or capabilities required byphysical distribution flexibility, demand management flexibility and coordinationflexibility are critical and scarce for Company Z, Company Q, and Company P, whichmeans thatthese three companies must use a large proportion of their limited resources tofocus on only one kind of distribution flexibility and putless emphasis on the other two. Incontrast, these resources are easy to access for Company J, which means that Company Jcan take advantage of plentiful resources or different capabilities to balance all threedimensions. That may also explain why the distribution network structure of Company J

is more complex compared to the other three as well as why co-alignment of distributionflexibility will lead them to seek corresponding distribution performance outcomes.

According to the cross-case analysis, the density and strength of Company P’sdistribution network lie mid-way between those of Company Z and Company Q. In theirdistribution flexibility strategy, the level of coordination flexibility is very high, while theother two dimensions are lower. As a result, they maintain steady and long-termrelationships with their stores and franchisees whose mortality is very low. But they donot care whether they will necessarily gain profits from their stores in prefecture-levelcities or whether they have spent too much on their free dry cleaning service in the shortterm. These observations suggest that Company P fits a strategy focused on coordinationflexibility with average relational and structural embeddedness in its distributionnetwork and has a long-term distribution efficiency and effectiveness orientation.

According to the analysis of distribution flexibility strategy, Company Z focuses onthe dimension of physical distribution flexibility. The distribution network of CompanyZ is correspondingly composed of dense ties (a large number of existing linkages with asmall number of potential linkages) and strong ties (that is, here, a high frequency of communications, sharing of important information, and high reciprocity), whichtogether demonstrate a high degree of relational and structural embeddedness.Furthermore, Company Z is oriented toward service outputs such as efficiency indispatching and it emphasises the loyalty of their distributors, which together suggest

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that their distribution performance outcomes are either short- or long-term efficiencyoriented. These observations suggest that Company Z fits a strategy focused on physicaldistribution flexibility with high relational and structural embeddedness in itsdistribution network and has a short- and long-term orientation toward distribution

efficiency.In contrast, Company Q focuses on the dimension of demand management

flexibility. Their distribution network is very different from Company Z. They have farfewer existing linkages with agents, although the number of potential linkages is closeto that of Company Q and they also maintain some bridging connections. Thus, theirnetwork ties are weak and sparse, which suggests low structural embeddedness. Inaddition, Company Q’s connection with distributors is much weaker than othercompanies as their communications with agents are of low frequency, which togethersuggest low relational embeddedness. But in contrast to Company Z, Company Q usessome “soft” performance evaluations (for example, in terms of the capability andfrequency of academic promotions) and the relationship satisfaction of agents is high,which together suggest that Company Q is oriented toward distribution effectiveness.These observations suggest that Company Q fits a strategy focused on demandmanagement flexibility with low relational and structural embeddedness in itsdistribution network and has a short- and long-term orientation toward distributioneffectiveness.

Company J, who exhibits high levels of physical distribution flexibility, demandmanagement flexibility, and coordination flexibility, has a very complex distributionnetwork. They have a large number of first level distributors and small retailers but alimited number of large retailers with whom they sign strategic alliance contracts. Alldistributors as well as “5 Star” stores exclusively sell Company J’s products, but largeretailers may sell many competing brands at the same time. Furthermore, Company Jcommunicates with distributors frequently and also establishes joint problem-solving

mechanisms with distributors although their meetings with large retailers are only heldoccasionally. In addition, there is a key account department that takes charge of issuesrelated to large retailers. As their market continues to expand, Company J not onlymaintains good relationships with all of their channel members but also pays increasingattention to short-term distribution performance outcomes such as reduced costs,efficient delivery, and enhanced service quality. These observations suggest thatCompany J fits a strategy of distribution flexibility co-alignment with a mixture of both high and low relational and structural embeddedness in its distributionnetwork and has a short-term orientation toward both distribution efficiency andeffectiveness.

Conclusions and implications

Using a case study method, this paper analyzes different dimensions of distributionflexibility and also argues that each company systematically balances or combinesdifferent dimensions under differing conditions. Based on contingency theory, theresults also suggest that the distribution flexibility strategy chosen by the companyshould match its particular context. Furthermore, there is a gestalt or covariance amongnetwork structure, flexibility strategy and performance orientation. Table III depictsfour distribution flexibility strategies implicit in the four cases given their respectiveenvironmental situation.


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Theoretical implicationsBased on the review of previous flexibility studies, the first contribution of this study isto clarify the definition and dimensions of distribution flexibility. We suggest thatdistribution flexibility is a kind of capability embedded in the supply chain to change

distribution processes including physical distribution, demand management andrelationship management in an efficient or effective manner to adjust to requirements of both direct and indirect customers. Thus, distribution flexibility is composed of physicaldistribution flexibility, demand management flexibility, and coordination flexibility.Moreover, while analysing the four companies, we found that physical distributionflexibility manifests itself in terms of flexibility in manufacturing, delivery,transportation, storage, and inventory; demand management flexibility manifestsitself in terms of flexibility in assortment, order fulfilment, customer service, price, andpromotion; while coordination flexibility includes flexibility in relationship content andflexibility in relationship structure.

Few studies of flexibility have developed taxonomies that distinguish amongdifferent categories or types of organisations and contexts and that systematically

consider relationships among the variables within each type. Thus, the major theoreticalcontribution of this study is its use of contingency theory to explore alternative forms of fit in making and implementing different kinds of distribution flexibility strategies.In conclusion, under different circumstances, each company implemented a distinctivedistribution flexibility strategy of focus or coalignment to adapt to their specificdistribution environment. These adaptations depict a condition of fit as matchingbetween strategy and environment (Venkatraman, 1989). Furthermore, the strategy thatfits a particular distribution network will lead a company to a correspondingperformance outcome, but whether this is a condition of fit as covariation or fit asgestalts is determined by the degree of specification of the resources and capabilitiesdemanded by the type of flexibility strategy (Venkatraman, 1989).

Managerial implicationsBased on the case studies, we suggest that there are at least four ways of makingdecisions about distribution flexibility, although given the limited number of cases,there might, of course, be more choices not observed here which are also potentiallysuccessful. What is more important than looking at these four companies as benchmarksis that managers may want to consider a “three-step decision making process” whenconsidering what kind of distribution flexibility strategy is appropriate for theircompany and how to implement the strategy to achieve their goals.

Uncertainty Low High

HeterogeneityLow Company P Company Z Coordination flexibility focused Physical distribution flexibility focused

Average strong and dense network Strong and dense networkLong-term efficiency and effectiveness Short- and long-term efficiency

High Company Q Company J Demand management flexibility focused Distribution flexibility coalignment

Weak and sparse network Mixed networkShort- and long-term effectiveness Short-term efficiency and effectiveness

Table III.Distribution flexibilitystrategies of the fourcases

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The first step would be to scan the distribution environment of their company by usingtwo dimensions: stability-uncertainty and homogeneity-heterogeneity. To determine thelevel of uncertainty, analysis of uncertainties in demand, competition and technology areimportant aspects, while variability analysis of the product category and customer

segmentation can help determine the level of heterogeneity. Finally, according to Table I,after determining (a) whether evidence favours uncertainty or stability, and (b) whetherit favours heterogeneity or homogeneity, the manager could position their company onthe coordinate axes for the distribution environment:

. low uncertainty and low heterogeneity;

. high uncertainty and low heterogeneity;

. low uncertainty and high heterogeneity; or

. high uncertainty and high heterogeneity.

The second step would be to choose a distribution flexibility strategy that either focuseson one dimension or combines several dimensions of distribution flexibility as amechanism to adapt to the environment in which the company is located. The results of our case study indicate that:

. Like Company P, if in a stable and homogenous environment, a strategy focusedon coordination flexibility which invests more resources in making changes inon-going relationships while maintaining rigidity in other activities is a betterchoice.

. Like Company Z, if in a an uncertain but homogenous environment, a strategythat focuses on physical distribution flexibility which requires investing more inadjusting manufacturing and logistics while maintaining relatively rigid levelsof other activities would be more appropriate.

.

Like Company Q, if in a stable but heterogeneous environment, a strategyfocused on demand management flexibility fits best: this strategy requiresrelatively more investment in adjusting marketing activities while maintainingmore rigid policies for other activities.

. Like Company J, if the environmental context is both uncertain andheterogeneous, a distribution strategy of flexibility coalignment is better,although the company must have sufficient resources and capabilities to achievea high level of flexibility in all activities that are cross-functional.

Moreover, Table II could be used as a check list for managers to make a more completeplan for each flexibility component.

The final step would be to be sure that the strategy chosen by the company fits with

their distribution network structure as well as their distribution performanceorientation. To identify the type of distribution network structure, managers need todetermine tie density by calculating the ratio between real and potential linkages, anddetermine tie strength by analysing reciprocity, communication, information sharingand other activities. In addition, distribution performance indicators can help determinewhether the company is oriented toward efficiency or effectiveness in the short or thelong term. As shown in Table III, the strategy of Company P which focuses oncoordination flexibility matches their environment to the extent that an average strong


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and dense network offers the resources that are needed for this strategy. Furthermore,Company P meets the long-term orientation that is arguably associated withcoordination flexibility. But if customers began to ask for high customization, whichwould indicate that the environment had become more heterogeneous, Company P

should instead move to a strategy focused on demand management flexibility much likeCompany Q and also prepare to establish a weak and sparse distribution network,resulting in a new orientation toward effectiveness. If, instead, great changes in demandvolume or manufacturing technology took place in a short time, indicating a highlyuncertain environment, they should invest more in physical distribution activities muchlike Company Z and adjust their distribution network with more strong and dense ties,resulting in an efficiency orientation. Or if both situations should occur, a focus strategywould be replaced with a coalignment strategy much like Company J and a mixeddistribution network could offer the kinds of resources required to make appropriateadjustment of activities across different functions. The potential importance of such adynamic fitting process is also a critical basis for any future longitudinal study.

Limitations and future researchAs in many exploratory case studies, there are several shortcomings that limit thegeneralisability of this research. First, in these case studies, we did in-depth interviewsof key informants from only four typical manufacturers. Thus, the sample of firms doesnot allow for statistically significant inferences. Second, although these companies coverboth domestic and international business, all of their headquarters are located in China.Clearly as many multinational firms are increasingly considering China as one of the topstrategic markets, one fundamental question concerns the type of distribution channel touse (Stern etal., 1996). Although the political environment in China is very different fromthat of western countries, we did not consider any institutional factors in this study. Infuture research, it would be beneficial to conduct a comparative study in a different

institutional environment.Third, there are also some limitations to the research design. As all the data were

collected at a single point in time, it is not possible to detect changes that occur over time.But from a dynamic perspective and as indicated in the previous section, manyconstructs in our framework would change with time, thus future research could employa longitudinal study to trace the dynamic processes. Furthermore, we conducted theinvestigation from the perspective of manufacturers, but partnerships between channelmembers are created by bilateral and coherent behaviors rather than through theexpectations of one party.

Finally, in order to apply the theoretical contingency frameworks, variance wasgained from companies located in different kinds of environments to ensure thatdistribution flexibility strategies chosen by them would be quite distinguishable.

However, this method could result in selecting companies from different sectors of manufacturing with differences in size, products, internal resources and capabilities,and even different flexibility cost structures. These trade-offs are very hard to resolve inone study, especially when the objective of the study is to investigate how amanufacturer survives in a given circumstance by choosing an appropriate distributionflexibility strategy. However, future research could examine how organisations whohave chosen a given distribution flexibility strategy configure themselves for optimalimplementation from the standpoint of resource utilisation.

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