rescuing troubled alliances… before it's too late

European Management Journal Vol. 18, No. 2, pp. 173–182, 2000 2000 Elsevier Science Ltd. All rights reservedPergamon

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MANAGEMENT FOCUS

Rescuing TroubledAlliances… Before It’sToo LateAFRICA ARINO, IESE, University of Navarra, SpainYVES DOZ, INSEAD, France

Based on case study research, the authors show howalliance failure often follows the opening of a gapbetween expectations and intermediate outcomes.Failure to detect and attribute the cause of a short-fall, followed by misunderstandings among thepartners pave the way to failure. They provide somesuggestions on how to rescue alliances in crisis. 2000 Elsevier Science Ltd. All rights reserved

Although strategic alliances between firms areincreasingly numerous, their failure rate seems toremain high (Pearce, 1997; Hennart et al., 1998). Asalliances are and will continue to be an importantmeans to strategic ends (Reuer, 1998), we need tounderstand why they fail so that crises can be avert-ed.

European Management Journal Vol 18 No 2 April 2000 173

Alliances fail in several ways. Some are virtually still-born, i.e. their announcement is followed by littleaction, and by no binding commitment, and thewhole relationship is quietly forgotten after a fewyears. Singapore Airlines, for instance, joined analliance spearheaded by Swissair in the 1990s, butquietly exited after a few years. Other relationshipsare called ‘alliances’, but are, in fact, little more thana joint action between companies bringing comp-lementary products, for instance the so-called part-nership products in the computer industries or thejoint bidding for enterprise integration projectsbetween SAP and hardware and IT consulting part-ners. More importantly, alliances sometimes fail afterpartners have expended great resources and exer-cised enormous efforts to make them work, only tosee the alliance be discontinued after a few years.Other alliances keep hovering for a while but neverquite fulfil the expectations of their partners. Yet, itis often difficult to fully ascribe the lack of success ofthese alliances to changing conditions that make theirfounding premises obsolete and no longer justified.

Our research on the evolution of alliances (Arinoand de la Torre, 1998; Doz, 1996; Doz and

Hamel, 1998) suggests a more complex set ofcauses of alliance failure over time. Many of

the observed failures could have been avo-ided, had their causes been better under-

stood by the managers involved. Failureusually followed the opening of a per-

ception gap, on the part of managersinvolved in the alliance, between

expectations and intermediateresults. Intermediate results fell

short of the expectations theyharboured for the alliance.

Their often erroneous causalattribution of intermediate

RESCUING TROUBLED ALLIANCES,… BEFORE IT’S TOO LATE

outcomes and process difficulties, led managers toquestion the validity of their expectations, and to dis-continue the alliance, or to enter into a prolongedperiod of dissatisfaction with the alliance perform-ance, leading to lessened commitment and to thealliance withering away over time.

Although some of these shortfalls between expec-tations and results reflected dramatically alteredexternal conditions which doomed the alliance to fail-ure, we noted, in our research, many cases where itwas not so much the expectation shortfall itself whichcreated problems, but how partners identified itscauses and reacted to its occurrence. Causes wereoften misdiagnosed, in ways that made the partnersmore suspicious of one another than need be, andmisdiagnosed causes led to mis-targeted action onthe part of the partners, jointly or singly, whichproved ineffective and bred further suspicions.

This paper explores and analyses causes of alliancefailure by highlighting how these expectation short-falls jeopardise the continuation of an alliance andthe commitment of the partners to the alliance’s suc-cess. In particular, we analyse how easily misdiag-nosed causes of expectation gaps led partners to takedamaging, rather than helpful, corrective actions.

The paper is organised in five sections. The first sec-tion maps out the starting point of our analysis byshowing how process and outcome shortfalls can beseen by the involved partners as either efficiency orequity shortfalls, and as either exogenous orendogenous to the partnership. The second sectionhighlights the difficulty of accurately diagnosing thecauses of expectation shortfalls and shows how diag-nostic difficulties can lead to misattribution of causeand loss of trust and co-operation between partners.The third section introduces the more functional pat-terns of partners’ responses to expectation shortfalls,depending on their perceived nature and causal attri-bution. Although these ‘usual’ patterns of interactionare relatively clear in their functionality, the interest-ing question is why partners depart so easily fromfunctional interaction patterns. To try to answer thesequestions, in the fourth section we illustrate, basedon two cases from our recent research, NAMCO–Hexagon and FCB–Publicis, both failed alliances,how misunderstandings between partners aboutdetection and attribution of expectation shortfalls, ledto alliance failure. In the fifth section, we discuss suc-cessful or unsuccessful patterns of interactions whenalliances get into trouble, and develop some mana-gerial implications about how to decrease the likeli-hood of alliance crisis and how to foster constructiveinteraction patterns in order to rescue alliances whenin crisis.

European Management Journal Vol 18 No 2 April 2000174

The Process of Co-operation: theInteractions between Expectations,Outcome Indicators and Process Quality

As they engage in the alliance, the partners learnabout the alliance task, its working, and the others inthe partnership, through the process of co-operation(Doz, 1996). As they work together, each partner alsoengages in an ongoing assessment of the alliance onessentially two dimensions:

Outcome assessment: each partner assesses theintermediate outcomes from the joint activities assignals and clues about potential future value cre-ation. For instance, successfully blending techno-logies from the partners into a workable new pro-duct prototype is an intermediate outcome thatcan be assessed positively, as increasing the likeli-hood of higher value creation once that new pro-duct is introduced in the market. Conversely, thefailure of an alliance product on the market, orthe failure of the partners to agree on commonspecifications for joint product development, arenegative intermediate outcomes.Process assessment: in interacting with theother(s), each partner also assesses the quality ofthe process of working together. If the co-oper-ation is difficult, rocky, or simply ‘eventful’, thepartners may assess the process negatively. If thepartners do not give out constructive clues, do notsignal trustworthiness through forbearance andunilateral commitment, suspicions of inequitymay arise. If the partners do not adjust the waythey work to make the alliance successful, sus-picions of inefficiency may creep in. The processmay also just appear too stressful or too eventfulfor participants in the partner organisations to becomfortable. In the early stages of alliance devel-opment, the partners typically watch and monitorthe other(s) carefully to identify signals of co-operation.

Outcomes and process assessments are made againstthe initial (or raised, as co-operation unfolds) expec-tations of the partners in the alliance. In other words,each partner brings to the alliance some specificexpectations. They cover both value creation (whatvalue the opportunity targeted by the alliance willbring and how the partners pursue it) and valueappropriation (how the partners will equitably sharethe benefits from the alliance, presumably in pro-portion to their contributions and efforts).

Both outcome and process assessments contribute tothe ongoing dual measurement of value creation(directly through intermediate outcomes, andindirectly through adjustments to the process of co-operation), and of value appropriation (directlythrough intermediate outcomes that are perceived asmore or less one-sided, and indirectly through equityclues in the process of co-operation).


Expectation shortfalls develop when the gap betweenpast expectations and current assessments widensbeyond what is acceptable to a partner. In otherwords, in the alliance failures we observed, the issuewas not the absolute value creation potential (ex-ante,this is an efficiency frontier no one can place quiteaccurately), but the perceived differences betweenpast expectations and current assessments (Figure 1).

What action a partner takes in response to an expec-tation shortfall, depends firstly on his ability to detectand identify an expectation shortfall, and secondlyon his attribution of the shortfall to one cause oranother. Although there are many possible causalattributions, perhaps one key dimension is whetherthe partner attributes the shortfall to some external,exogenous, factor (such as a technology change), orto an internal, endogenous, feature of the partnerbehaviour (such as a lack of commitment oradjustment) which makes co-operation difficult. Asecond differentiation of partners’ responses iswhether the perception of expectation shortfalls car-ries an implication of the partner not having deliv-ered, or a mere change of conditions not under anyof the partners’ control.

In our research, we observed all four types of diffi-culties. For instance, when Oris, a French producerof medical diagnostics terminated its alliance withSyncor, a US radiopharmacy distributor, it reflectedthe move of diagnostic kit technologies away fromradio diagnostics, the radioactivity of which requiredspecially trained and licensed distributors such asSyncor, to more regular distribution. This made thealliance obsolete but the shortfall was, correctly, attri-buted to external difficulties. Conversely, whenAT&T did not develop in a timely fashion the appli-cation software that would have turned its telecomdigital switch processors into minicomputers suitablefor distribution by its then European partner Olivetti,Olivetti saw in this delay the manifestation of a lackof commitment. Similarly, equity shortfalls could alsobe seen as stemming from either exogenous orendogenous forces. The evolution of medical diag-nostic technology, for instance, led to a perceived

Figure 1 Mapping Expectation Shortfalls


imbalance in Ciba’s favour in their joint venture withCorning, leading to Corning’s divestment from theventure. Here too, the imbalance was, correctly, attri-buted to unexpected market and technology develop-ments. Conversely, Alza, a Californian developer ofdrug delivery systems suspected its key partner,Ciba-Geigy, of dragging its feet to avoid paying heftylicensing fees on which Alza’s survival depended,and of trying to develop next generation products onits own. Conversely, Ciba-Geigy quickly came to seeAlza as having ‘oversold’ as fully developed techno-logies that still required a lot of work in order to bemade operational. After four years of mounting mut-ual suspicions the alliance was terminated.

Diagnosing Expectation Shortfalls

Expectation shortfalls are particularly vulnerable tofalse attributions. Not only do they face the classicissue of seeing the partner as a ‘culprit’ (of lack ofcommitment, self-interest, guile, etc…) and oneself asa ‘victim’ (of circumstances beyond one’s control),they also face more specific issues.

Failures of Detection

Process failure is not always easy to detect, partlybecause partners attribute unsuccessful outcomes topartners’ contributions, without necessarily takingthe time to open the process ‘black box’. The analysisof new product development in the Alza – Ciba-Geigy alliance provides a clear example of where theprocess of co-operation between the partners wasdeficient, but where the difficulties were ascribed topoor contributions, not to an inadequate process. Infact, Ciba-Geigy was not dragging its feet but findingit difficult to blend system technologies and chemi-cals into a form that could be mass-manufacturedreliably. Even worse, processes that are inefficient butnot particularly eventful may go undetected for along time. In joint defence system development andmanufacturing, for instance, the European aerospaceindustry, contented itself for a long time with a veryinefficient process that preserved the range of com-petencies of each company, and sometimes widenedit, but seldom led to efficient specialisation andwork-sharing.

Detection of inequity is fraught with even more dif-ficulty than that of inefficiency. First of all, even inthe absence of deliberate hidden agendas, the inter-ests and benefits of each partner are not so easy forthe others to fathom. The mutually visible and agreedupon set of outcomes of a partnership are only a(potentially small) fraction of the complete set of out-comes the partners may face.

Beyond the visible and mutually expected set of out-comes lies a series of other potential outcomes of


lesser or greater value to partners. The explicit agree-ment covers only part of the scope of benefits. Forinstance, a partnership’s explicit and shared visibleoutcome may be to develop a new product jointly,but in so doing the partners may reveal their skills toone another and thus create potentially much greaterbenefits. Some of these benefits may be discoveredpost hoc and they may not be equally available to eachpartner, given differences in contributed skills. Onepartner may learn more from the joint work thanthe other(s).

Not only are the potential outcomes hard to see, buttheir discovery, or unveiling, leads expectations ofvalue creation potential to be revised. In other words,as the partners engage in the co-operation process,and as it evolves over time, not only do they assessintermediate outcomes against expectations, theyalso keep changing the goalposts by revising theirexpectations. Indeed, the more successful allianceswe observed and analysed were characterised byexpanding ambitions and growing expectations onthe part of the partners (Doz, 1996; Doz and Hamel,1998, ch. 7).

Furthermore, the partners may not measure expec-tations and outcomes according to the same yard-stick, making collaboration sometimes easier, butmutual understanding more difficult. Not fullyappreciating the criteria against which a partner mea-sures partnership outcomes obviously makes thedetection of what may constitute, for him, an expec-tation shortfall more difficult. Understanding a part-ner’s cost–benefit profile for the alliance is difficult,when the partners are organisationally, culturallyand strategically distant and, hence, do not share acommon set of yardsticks.

Detection of an expectation gap is also made difficultby the fact that it usually calls for a judgement onfuture events. The partners may differ in their timehorizons and in their reactivity to intermediate out-comes. The structure of the agreement and the rela-tive stakes the alliance constitutes for each partner,particularly when they differ quite considerably insize, influence time horizons in rather obvious ways.Faced with delays in product development whichdeferred royalty streams, Alza saw its very survivalat stake, Ciba-Geigy only saw a missed opportunityof limited magnitude. The nature of corporate plan-ning and control processes of the partners, and theirtime horizon, may also affect the extent to whichintermediate outcomes are perceived as expectationshortfalls. For instance, it was known that new civ-ilian jet engines needed to be developed first beforeplane makers would commit to them. Yet, yearspassed before they registered any sales for their newproduct in the 1970s. This put considerable strain onGE – SNECMA, given GE’s planning process, and ledthe partners to almost drop their project.

Then of course, mixed motives and hidden agendas


may lead a partner to defend the pretence that analliance is successful, whereas other partners see it asfalling substantially short of their expectations. IBMin the Power PC alliance, for instance, seems to haveevinced less than wholehearted commitment. Thisled to the suspicion, on the part of its partners Appleand Motorola, that IBM’s main motive was to createan alternative to Intel as a supplier of micropro-cessors, but not necessarily to see it succeed. WhereIBM saw success, the others saw failure, given differ-ent true motives.

Finally, different types of organisations are unequallysensitive to both outcome and process shortfalls.Their ‘pain threshold’ is quite different. The qualityand speed of internal communication are big deter-minants of organisational pain. In their collaboration,Olivetti was extremely sensitive to AT&T’sdeficiencies, and reacted to them immediately.AT&T, a bigger, more fragmented and more bureau-cratic organisation was less sensitive.

In other words, detecting both process and outcomeshortfalls, particularly when they affect another part-ner, and even sometimes when they affect oneself, isnot such an obvious endeavour.

Failures of Attribution

Deterioration of external conditions is perhaps themost obvious source of expectation shortfalls inalliances. Yet, at least two types of situations needto be clearly distinguished. Some changes in externalconditions undermine the very basis for the alliance(Oris–Syncor). Others affect the performance of thealliance’s business, but are actually neutral vis-a-visthe alliance or make it even more useful and valuable(Eurocopter in 1991). In other words, one needs tocarefully separate external conditions which affectthe performance of the alliance from those that affectthe performance of the alliance’s business.

Beyond the rather obvious issue raised above, fail-ures of attribution often stem from more complexcauses.

First of all, the separation of endogenous and exogen-ous causes is not always so easy. In the Hexagon–NAMCO case (Arino and de la Torre, 1998), Hexa-gon’s management believed that NAMCO’s distribu-tors were committed, and saw them as ‘internal’ toNAMCO; conversely, NAMCO saw them as ‘exter-nal’, and believed it had committed only to introduc-ing Hexagon to its distributors, not them taking andpushing Hexagon’s (or the joint venture’s) productsinto their stores.

Where to ‘place’ the boundaries of the alliance part-ners to decide what is endogenous and what isexogenous? First of all, the scope of the alliance maybe quite different for each, with the alliance having


a broader scope for one partner than for the other(s).If for one partner, nearly all the relevant outcomesattributable to or affected by the alliance, take placein the shaded area of Figure 2, whereas for the otherthe whole outcome space mapped in Figure 2 is rel-evant, perceptions of alliance boundaries will differbetween partners. This type of difference became asignificant issue in several alliances between ethicaland OTC pharmaceutical companies: to the ethicalcompany, deciding what to do with products comingoff-patent was part of a wider set of considerationsthan to the generic company, who only saw the pro-duct’s own merits. When the alliance was set up asa joint venture, the generic company complainedabout its partner taking decisions that were not inthe best interest of the joint venture, leading severalalliances of this type towards premature termination.

Secondly, in a large multi-unit firm, is the whole ofthe firm committed to an alliance, or only a particularsub-unit, product division or national subsidiary? Inthe latter perception, an alliance can be affected byshifts in corporate priorities quite distant from thoseof the involved units. Managers in these units arelikely to perceive them as exogenous shifts, whereasmanagers in the partner organisation may well per-ceive them as endogenous, and obviously blame theirpartner for them. When Texas Instruments pulled outprematurely from an alliance with PixTech, anentrepreneurial flat screen development company,the involved TI executives interfacing with PixTechperceived the decision as exogenous. They belongedto a components division, the division pulling theplug was their customer, the personal computer busi-ness who was stopping development as a prelude toselling their laptop business to Acer. To PixTech, itwas all TI!

In short, attributing an expectation shortfall toendogenous or exogenous causes may be difficult,because the boundary between what is external andwhat is internal to the alliance partner may notalways have been drawn clearly, and because part-ners may actually disagree on the proper position ofthat boundary.

A third difficulty in deciding on exogenous vsendogenous causes stems from the very evolution of

Figure 2 Partnership ‘Outcomes’: A More Complex Issue than Generally Seen


an alliance. Take the ill-fated alliance between adver-tising agencies Publicis and FCB. When the two com-panies negotiated the alliance, FCB, whose Europeanoperations were losing substantial amounts ofmoney, were not performing well, was happy toplace them in a Publicis-run joint venture, part oftheir overall alliance. A few years later, the Europeanjoint venture was highly profitable. Although bothpartners were happy with this development, theirinterpretation of it was radically different. Publicistook pride in having turned them around, andresented having to share half the profits with FCB.Some FCB managers now believed they had ‘sold’their crown jewel to Publicis for too low a price a fewyears earlier, and had second thoughts about the realvalue of their European network. FCB saw the rootsof success in its contributions, predating the alliance;Publicis in its good work in the alliance. Was thepatient healthier than it looked, or the doctor betterthan expected? Depending on how the question wasanswered, very different views on equity were boundto emerge.

As illustrated in the above example, the endogenousvs exogenous ambiguity interacts with perceptions ofhow fair vs one-sided an outcome is. Both FCB andPublicis perceived the outcome of their Europeanalliance as unfair, but in diametrically opposite ways.Gaining clarity as to whether an imbalanced outcomeis a result of external, unforeseen forces (e.g. theadvertising market picked up in Europe), of a part-ner’s diligent and competent efforts (Publicis turnedFCB-Europe around), or, still, of a partner’s shrewd-ness (Publicis took advantage of FCB’s relative lackof experience in Europe to undervalue itscontribution), is obviously not easy.

Yet, ambiguity on such issues can undermine trustbetween partners very rapidly.

Widening Shortfalls: the Interactions of Outcomeand Process Discrepancies

In situations where the cause of an outcome shortfallis ambiguous and one company is unable to dis-tinguish whether an endogenous or an exogenouscause is responsible for the shortfall, the pattern of


interaction between the partners is likely to influencethe final attribution. If companies are satisfied withtheir pattern of interaction, and have a goodrelational quality, they will be quick to attribute theshortfall to causes outside the partner’s control. Onthe contrary, if they are dissatisfied with the patternof interaction, and the relational quality is low, theywill be suspicious about their partner’s behaviour,and will be more likely to attribute shortfalls toendogenous causes within the partner’s span of con-trol.

When entering an alliance, a company holds certainexpectations regarding its partner’s future behaviour.Although there is always some uncertainty aroundthis, unless the initial expectations were positive, thealliance would never see the light of day. Throughoutthe co-operation process, learning about the partnertakes place. Perceptions about how the partnerbehaves substitute for the initial expectations. Thepattern of interactions builds a certain level ofrelationship quality. After each interaction, relation-ship quality is either enhanced or diminished. Whenan outcome, whose cause is ambiguous, is observed,the attribution actually made is dependent on thecurrent level of relational quality: the higher this is,the more likely partners will attribute the shortfall toan exogenous cause or, at least, will suspend judge-ment about the other company’s behavior. Also, theywill be more likely to engage in joint action to re-assess the situation, thus resulting in a greater chanceof restoring efficiency and/or equity. On the con-trary, if the level of relational quality is low, partnersare more likely to attribute ambiguous outcomeshortfalls to endogenous causes, and to react conse-quently in a unilateral fashion. This kind of reactiondoes nothing but add endogenous factors, thus lead-ing to a broadening of the shortfall. The situationdeteriorates further and further, leading eventuallyto alliance discontinuation.

Responses to Expectation Shortfalls:Functional and Dysfunctional

Expectation shortfalls are likely to trigger partneractions. Depending on whether the shortfall is per-ceived as an efficiency or equity shortfall, andwhether its causes are ascribed by a partner asendogenous or exogenous, these actions are likely tobe quite substantially different. Figure 3 belowsketches how these actions are likely to differ.

In summary, shortfalls identified by both, or several,partners as endogenous, efficiency issues are likelyto result in a revision of the governance and interfacemechanisms between partners in the alliance. Part-ners will undertake to reform their ways of work-ing together.


Figure 3 Reaction to Expectation Shortfalls

Exogenous efficiency shortfalls, if perceived as suchby both, or several, partners, are likely to result injoint analysis of the strategic aspects of the allianceand in joint decisions towards restructuring or dis-continuing the activities of the alliance. The partnersmay also take little action, and decide to continue thealliance unchanged but with diminished expec-tations.

A perceived exogenous loss of equity will presum-ably lead to partners opening a dialogue on valuecreation, value appropriation, and fairness of out-come balance, given the value of each partner’s con-tribution. This dialogue is likely to result in arenegotiation of the value appropriation clauses ofthe alliance in a way that creates a new balanceacceptable to the partners, and reflecting the changesin the external environment. They may, for instance,decide to apportion benefits differently, or to termin-ate the alliance, with one partner perhaps buying theother(s) out.

A shortfall in equity perceived as endogenous maywell trigger the most difficult, and unilateral, partneractions. The partner who feels taken advantage ofmay take a series of escalating measures aimed firstat testing the other partner’s motives and pattern ofbehaviour (Dierickx, 1998), followed by a reinforce-ment of discipline in alliance management, and, poss-ibly, stronger threats of discontinuation or unilateraldecommitment. This may, in turn, result in the dis-continuation of the alliance.

En-route to Failure: MisunderstandingsAbout Expectation Shortfalls

JVCO was a 50/50 joint venture between two multi-national companies — Hexagon from France, andNAMCO from the US. JVCO was formed to produceand distribute a new ecological cleaning liquid on aworldwide basis. Before signing the final agreement,


the partners added two other product areas, thinkingthis would allow broader collaboration in the future.These new product areas were a line of hypoallerg-enic soaps and skin care products, and ready-to-drink dietary substitutes. As part of the agreement,Hexagon would contribute its trade marks — ‘Hexa’,‘Hexa-Kleen’ and ‘Hexa-Care’ — and its productiontechnology and know-how. On its part, NAMCOwould contribute access to its global network of inde-pendent distributors who performed manufacturing,packaging and distribution functions, and wouldassist JVCO in demonstrating to its independent dis-tributors the advantage of introducing and aggress-ively promoting JVCO’s products. JVCO would reim-burse the partners the cost of using their resources,and profits and losses would be split 50/50. What atthe beginning seemed a straightforward deal, soonstarted trembling.

Early in the life of JVCO, its management teamlearned that the ‘Hexa-Kleen’ business was hard todevelop, as the ecological cleaning liquid was a newproduct category requiring major developmental andadvertising efforts. Willing to break even as fast asthey could, the management team turned their atten-tion towards the ‘Hexa-Care’ business of skin careproducts. This move was not made with the consentof the partner firms, but rather was an independentmove by the management team.

An immediate consequence of the move towardsHexa-Care was cannibalisation of NAMCO’s pro-ducts. While the distribution of Hexa-Kleen requirednew equipment that would be bought by JVCO,Hexa-Care could be distributed using the same chan-nels and distribution space as those for NAMCO’sproducts. In these circumstances, NAMCO started tosee how each unit of Hexa-Care sold undermined itsown sales. This shift in JVCO’s main goal resulted inboth an efficiency and an equity shortfall to NAMCO:on the one hand, cannibalisation resulted in a dropin the value created for NAMCO, and on the otherhand NAMCO’s contributions were greater thananticipated. Again and again, NAMCO claimed thata more specific agreement regarding the availabilityof the NAMCO distribution system was necessary.Cost reimbursement was not compensation enough,and NAMCO’s units could not be expected to pushJVCO’s products when they were cannibalising theirown. Hexagon viewed the facts differently: NAMCOwas not truly committed to the joint venture, and wasfailing to contribute the resources it had committedto. As a consequence, JVCO was not creating as muchvalue as it was initially thought to do.

Hexagon’s view was mediated by another eventwhich was also interpreted differently by each part-ner. BigName, a company in the skin care productsmarket, had been using the manufacturing facilitiesof NAMCO’s network of independent distributors.Upon hearing about JVCO, BigName broke its con-tracts with the distributors, and formed a joint ven-


ture modelled on JVCO with Rival Corporation,NAMCO’s strongest competitor in its main business.The contracts with the distributors included a clausestipulating that, upon unilateral interruption of thecontract, BigName should stay out of the market forone year. However, BigName approached the dis-tributors and offered them a certain amount ofmoney as a compensation for letting them back intothe market. The first one to accept was Southern Dis-tributors, who received $1.5 m. Others soon followed.NAMCO’s President communicated the affair toHexagon on the phone the day before the news wentto the press. Hexagon could not understand howNAMCO had allowed the main player in the Hexa-Care business back into the market for a measly $1.5m. The issue was aggravated by the fact that NAM-CO’s CFO was at the same time a Board member ofJVCO and Southern Distributors. Couldn’t he haveavoided the situation? From NAMCO’s perspective,there was nothing they could have done: they onlyhad a minority share in Southern Distributors, andthus could not control the decision. Besides, their pol-icy was not to interfere with the distributors’ oper-ational decisions. From Hexagon’s perspective,increased competition would result in lower valuecreation, and NAMCO was responsible for this. FromNAMCO’s viewpoint, this efficiency shortfall wasdue to an exogenous cause: the deals betweenBigName and the distributors, which were externalto NAMCO.

In this context, Hexagon was apt to believe thatNAMCO was not committed to the venture. In anattempt to test if this was the case, Hexagon agreedto compensate them for the use of shelf space: havingremoved the obstacles NAMCO claimed to have forperforming as expected, their future behaviourwould show whether or not they were really commit-ted to JVCO. Hexagon expected to clarify whetherNAMCO’s under-commitment of resources was dueto an exogenous (as claimed by NAMCO) or anendogenous (as claimed by Hexagon) cause.

However, another incident occurred. In theirattempts to re-balance the lost equity, NAMCOclaimed extra compensation for its Retail Division forits sales of JVCO’s products in the beauty salon andhairdresser channels, in the same way that JVCOwould compensate a third independent party per-forming the same functions. In this way, NAMCOreached a unilateral agreement with JVCO uponwhich they would split the profits generated by thesesales. JVCO agreed to the request believing that itwould be difficult to replicate the Retail Division’sunique market position in those channels. ToNAMCO this was nothing but a fair deal: JVCO wasnot obliged to use the Retail Division; if they choseto do so, they would have to compensate for that.From Hexagon’s perspective, this concession bre-ached the 50/50 split agreement. If NAMCO’s RetailDivision was to get 50 per cent of the profits from itssales, and then the 50 per cent accruing to JVCO was


to be divided equally between NAMCO and Hexa-gon, NAMCO’s share of JVCO’s profits would exceedHexagon’s share. To Hexagon, this made the relation-ship clearly inequitable. In their view, not only wasNAMCO under-committing resources (and thus dim-inishing the potential for value creation), but theywould also get a greater share of the pie (resultingin greater value appropriation to the detriment ofHexagon).

As a reaction, Hexagon started to engage in a seriesof unilateral actions that signalled its dissatisfactionwith NAMCO’s behaviour. For instance, Hexagondelayed key work in new formula development, andbacked out of transferring its dietary liquids businessto JVCO. Eventually, upon denial of help fromNAMCO in distributing Hexagon’s products in anAsian country, Hexagon threatened to make the dealwith NAMCO’s main rival.

After this series of unilateral actions and reactions,the partners did not have any common ground torestore the lost efficiency and equity. Each had attri-buted shortfalls to different causes and, therefore,could not agree to any means of re-balancing therelationship. Dissolution came when NAMCO sug-gested enlarging JVCO’s scope to become an exten-sion of Hexa-Care, specially adapted to the Asianmarkets. Hexagon’s priorities were in the Hexa-Kleenbusiness. After some discussion, the partners decidedto discontinue JVCO.

FCB and Publicis decided to bring their networkstogether in order to offer a strong and well distrib-uted global network so as to secure their inter-national clients and attract more. As the companiesglobalised, they saw an increasing need to serve theirglobal brands with complete geographical coveragefrom their providers of advertising services. FCB wascomparatively weak in Europe, despite efforts todevelop a presence via a series of recent acquisitions.Publicis was just beginning in the US where its activi-ties were largely confined to serving the local subsidi-aries, one major French client and quasi non-existentin continents other than Europe.

The agreement was multifaceted, but in the main,included two key features: (1) the European advertis-ing services operations of both companies (excludingthe French home operations of Publicis) were mergedinto a joint venture, 51 per cent owned by Publicisand 49 per cent owned by FCB, and (2), FCB acquired26 per cent of Publicis Communication’s equity(whose parent, a privately held company was con-trolled by the family of Publicis’ founder), and Pub-licis acquired 20 per cent of the equity of FCB (aNYSE quoted and publicly traded company).

As the performance of the European joint venture,and in particular that of the former FCB units,improved, divergent interpretations of the causes ofsuch improvements surfaced between the partners,


as summarised above. Publicis then acquired a smalladvertising agency that had operations in the US, andapparently discussed the acquisition informally withFCB’s management. In the meantime, the CEO at FCBwho had negotiated the alliance, had retired, and anew CEO, less supportive of the alliance, wasappointed.

Claiming that Publicis was competing in the US withFCB, FCB called for an arbitration clause and achange in the equity of the European joint venturefrom 49 to 51 per cent (something the initial alliancecontract made provision for in case of breech ofagreement). Arbitration proceedings started.

Publicis saw this as a hostile act, and a dysfunctionalunilateral move.

In fact, the perceived equity assessment shortfall onthe part of FCB had several root causes:

1. A growing realisation that a minority position inthe equity of a family-controlled private companygave them little influence, whereas Publicis was,by far, the largest shareholder of FCB, and littlechance to sell their shares as they wished. Inaddition, FCB was held to much tighter standardsof disclosure than Publicis, thus not allowing forbalanced access to information.

2. Differences in decision-making styles that allowedPublicis’ top management to be nimbler and moredecisive, and did not allow FCB’s top execu-tives — who had to seek consensus on all keydecisions — to shine equally well.

3. A sense of a loss of brand identity in Europe.4. The fact that FCB’s European operation had been

integrated into the more informal network of exist-ing Publicis offices where old-timers had an easiertime, and some FCB managers felt put at a disad-vantage by the functioning of this informal net-work.

It also turned out that, perhaps, global accounts werenot so global after all. By losing its strong US globalthrust, FCB lost some key, truly global brands —such as Colgate, Levi Strauss — whereas the FCB –Publicis alliance gained relatively few new USaccounts, leading to frustration at Publicis.

All these pent up frustrations were released by FCB’sunilateral seeking of arbitration. This, in turn, causeda loss of trust. A long delay in the arbitration pro-ceedings led to the demise of the alliance.

Rescuing Troubled Alliances

As can be seen in the cases just explained, the routeto failure is plagued with misunderstandings about


troubled situations. The endogenous–exogenousboundary is blurred, and so is whether circumstancesare within or outside each partner’s span of control.As a consequence, partners easily attribute expec-tation shortfalls to causes of a different nature. Thereis also the chance that one partner will not take theblame apportioned by the other. Having differentperspectives on what is causing an efficiency or equ-ity shortfall, and who is responsible for the situation,the partners are unlikely to agree on the means to getback on track. Not only will they take differentactions, but also their pattern of interaction willdeteriorate, and the quality of their relationship willbe destroyed. As this route becomes a vicious circle,it will be increasingly difficult for the partners to res-cue their alliance, which will sink in its troubles.

How can managers rescue troubled alliances…before it’s too late? The key issue is avoiding misun-derstandings about shortfall detection and attri-bution that lead to unilateral actions. But misunder-standing avoidance is not an immediate outcome.Rather, it requires training that starts in the earlydays of the alliance, and… lots and lots of communi-cation. Rather than taking unilateral action to restorethe (perceived) lost efficiency or equity, managersshould try to engage those in the partner companyin understanding the situation and searching for jointsolutions. For this, managers need to have a clearunderstanding about the partner’s interests and con-text. Our message is that even if troubles are virtuallyunavoidable, managers can rescue their alliance ifthey develop the right mindset:

❖ understand all the interests your partner mayhave in the alliance, both initial and emergent.Insofar as they do not clash with yours, you willbe able to find some common ground to solvethe troubles;

❖ understand the value your partner attributes tointermediate outcomes. Even if you value an out-come as positive, your partner may not do so.Awareness of this and involvement in solvingyour partner’s troubles will prevent them fromtaking unilateral actions you will not have con-trol over;


❖ if you value an outcome as negative, beware thatyour partner may value it as positive. Yourtroubles may go unnoticed by your partner unlessyou tell them;

❖ before blaming your partner, think of alternativecauses of your troubles. Things are not black orwhite, and you may discover your partner is nottotally responsible for the situation, if at all. Then,talk it over with your partner and look for sol-utions jointly;

❖ if the cause of your troubles is definitely relatedto your partner, before blaming it on your counter-parts, think of their organisational context andconstraints. Although at times they may be under-committed to the alliance or hold hidden agendas,the chances are that they are forced by their cor-poration to take particular actions. Again, talk itover with them and look for solutions jointly.

In summary, rescuing troubled alliances before it’stoo late requires understanding and communicationbetween partners which allow for joint problem-solv-ing. Letting oneself or the partner engage in unilat-eral action may make it too late for the rescue.

References

Arino, A. and de la Torre, J. (1998) Learning from failure:towards an evolutionary model of collaborative ven-tures. Organization Science 9(3), 306–325.

Dierickx, I. (1998) Cooperation: beyond tit for tat. Preliminarydraft, INSEAD.

Doz, Y. (1996) The evolution of cooperation in strategicalliances: initial conditions or learning processes? Stra-tegic Management Journal 17 (Special Summer Issue),55–84.

Doz, Y. and Hamel, G. (1998) Winning Alliances. Harvard Busi-ness School Press, Boston, MA.

Hennart, J.-F., Kim, D.-J. and Zeng, M. (1998) The impact ofjoint venture status on the longevity of Japanese stakesin the US manufacturing affiliates. Organization Science9(3), 382–395.

Pearce, R.J. (1997) Toward understanding joint venture per-formance and survival: a bargaining and influenceapproach to transaction cost theory. Academy of Manage-ment Review 22(1), 203–225.

Reuer, J. (1998) The dynamics and effectiveness of inter-national joint ventures. European Management Journal16(2), 160–168.


AFRICA ARINO, IESE, YVES DOZ, INSEAD,University of Navarra, Av. Boulevard de Constance,Pearson 21, 08034 Barce- 77305 Fontainebleau,lona, Spain. France.

Africa Arino is Assistant Yves Doz is the TimkenProfessor of General Man- Chaired Professor of Globalagement at IESE. She earned Technology and Innovationher Ph.D. in Management at and Professor of BusinessThe Anderson School, Policy. He leads a one-weekUCLA. Her research inter- executive development pro-ests focus on the evolution of gramme on the management

international alliances, with emphasis on the inter- of strategic alliances and is the co-author of Alliancepartner relationship. She teaches courses on strategy Advantage.and alliances at the MBA, Executive and Ph.D. levels.


rescuing troubled alliances… before it's too late

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