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Helsinki University of Technology Institute of Strategy and International BusinessWorking Paper Series 2000 | 10

Espoo, Finland 2000

STRATEGIC ALLIANCES – A REVIEW OF THE STATE OF THE ART

Thomas Keil

TEKNILLINEN KORKEKOULU TEKNISKA HÖGSKOLAN HELSINKI UNIVERSITY OF TECHNISCHE UNIVERSITÄT HELSINKI UNVERSITE DE TECHNOLOGIE D’HELSINKI

HELSINKI UNIVERSITY OF TECHNOLOGYDepartment of Industrial Engineering and Management

Institute of Strategy and International Business

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STRATEGIC ALLIANCES – A REVIEW OF THE STATE OF THE ART

Version December 1999

Thomas Keil

Helsinki University of Technology

Institute of Strategy and International Business

P.O. Box 9500, FIN - 02015 HUT, Finland

Phone: +358 – 50 - 562 2298

Fax: +358 – 9 - 451 3095

E-mail: [email protected]

Strategic Alliances – A review of the state of the art

1

ABSTRACT

Strategic alliances play a major part in the strategic set up of many firms. While this

mode to conduct economic activity has received increasing attention in the strategic

management literature, our understanding is still limited. This paper reviews the state of

the art of knowledge on alliances. In particular it reviews literature about the formation

of strategic alliances, governance of alliances, dynamics of alliances, and performance.

Based on this review, this paper extends this knowledge by investigating the role that

alliance management capabilities play in large firms that are engaged in a many

alliances. It is argued that with an increasing number of alliances firms are increasingly

forced to develop consistent practices within alliances and to coordinate between these

alliances.


2

INTRODUCTION

Strategic alliances are an important mode to conduct economic activity. Starting from the

1980s, the number of strategic alliances has rapidly increased in a large number of

industries (Hagedoorn & Schakenraad, 1990; Hergert & Morris, 1988). Aside from the

quantity, also the quality of strategic alliances has changed. Firms have started to enter

alliance close to their core business or even within their core business (Hagedoorn &

Schakenraad, 1990).

As firms have entered alliances with growing frequency (Hagedoorn, 1996), large firms

are simultaneously involved in up to hundreds of alliances (Gulati, 1998). In many cases,

even on the business unit level, the number of alliances is substantial. Because of the

large number of alliances and their strategic importance, it is important to understand the

opportunities and needs in managing these alliances simultaneously.

Managing multiple strategic alliances simultaneously might open new opportunities.

Firms might be able to create synergies across several alliances. Learning new

competencies might be achieved through the combination of skills acquired in different

alliances at the same time. Doz and Hamel argue that understanding the strategic linkage

between two firms requires understanding each company’s other alliances and their

interrelationship (Doz & Hamel, 1998: 29).

Managing multiple alliances raises new issues. Evidence suggests that systematic

differences in alliance capabilities of firms exist (Lyles, 1988). Simonin argues that these

differences explain part of the variance in the outcomes of strategic alliances (Simonin,

1997). It would seem important to deepen our understanding what an effective capability

to manage multiple alliances is and how firms develop such capabilities.

This paper attempts to make a step towards an extension of our understanding alliance

management and alliance capabilities. It reviews existing knowledge about strategic

technology alliances. Based on this review capabilities to manage alliances are discussed.

The paper is organized into six sections. The next four sections review important topics

in alliance research. These topics build on and expand several recent literature reviews

(Auster, 1994; Grandori & Soda, 1995; Gulati, 1998; Varadarajan & Cunningham, 1995)

and introductions to special issues on strategic alliances (Grandori, 1998; Osborn &

Hagedoorn, 1997). Topics are the formation of strategic alliances, governance of

alliances, dynamics of alliances, and performance. The fifth section discusses alliance

capabilities. The paper ends with conclusions.


3

FORMATION OF STRATEGIC ALLIANCES

The formation of strategic alliances has been studied from a number of theoretical

perspectives (Glaister & Buckley, 1996; Kogut, 1988a). In a number of studies, the

authors draw on the wider perspective of the formation of inter-firm relationships. For

instance, Grandori and Soda (Grandori & Soda, 1995) identify a large number of

antecedents for the formation of inter-firm relationships. An overview of different

antecedents of inter-firm relationship formation is summarized in Table 1.

Table 1 Antecedents for the formation of inter-firm relationships

Theory field Antecedents of network formation

industrial economics production cost, such as economies of specializationand experience, economies of scale, or economies ofscope

historical and evolutionary approaches technology, related costs and learning problems

organizational economics governance cost determined by asset specificity,

uncertainty, frequency, measurability, control, andrisk aversion

organizational perspective degree of differentiation between units,complementarity of units, interdependence, number ofunits to be coordinated, complexity of interdependentactivities, asymmetry of resources controlled, andflexibility

negotiation analysis structure of games, pareto-efficiency, fairness, andprocess of negotiation

resource dependence views types of dependence, breadth of relationship, and typeof interdependence

neo-institutional views legitimization and institutional embeddedness

organizational sociology social and cultural embeddedness

radical and Marxist studies class dominance

social network theory network positions, such as centrality, structuralequivalence, and network structure

strategy and general management position and competence characteristics

industrial marketing social exchange and dynamics in networks, andentrepreneurship

economic policy and economic law Externalities

population ecology economic effectiveness and efficiency, andlegitimization

Within the literature on the formation of alliances one can distinguish between studies

that have examined factors that explain the variance in alliance formation rates and a

second group of studies that have focused on motivations to enter into alliances (Gulati,

1998). The first group of studies identifies a number of factors on industry and firm level

that are related with a higher alliance formation rate. The second group of studies focuses


4

only on strategic motivations to enter into alliances. While largely overlapping, one

important difference exists between these two groups. By focussing on the motivation,

the second group ignores that even though strategically motivated, a firm might not be

able to enter into an alliance. Furthermore, one can argue that motivation is often a result

of factors on the firm level or industry level. Both bodies of literature are briefly

summarized here.

Factors affecting the alliance formation rate

Factors that affect the alliance formation rate have been found on industry and firm level

(Gulati, 1998). On the industry level of analysis, the degree of competition and the

development stage of the market and technology are discussed.

Eisenhardt and Schoonhoven (1996) argue that especially in markets with many

competitors and in markets that are in an emergent stage, firms exhibit a higher

propensity to enter into alliances. Burgers, Hill and Kim (Burgers, Hill, & Kim, 1993)

link alliance formation with environment uncertainty. They argue that alliances are a

means to reduce environment uncertainty. Dickson and Weaver (1997) extend the

analysis of the relation between environment uncertainty and the use of alliances. They

argue that perceived uncertainty should be more important in affecting behavior than a

pseudo-objective measure. To assess perceived environment uncertainty they define

different sources for uncertainty. The first source is general uncertainty about the impact

of a future state of the environment or environment change on the organization. The

second source of uncertainty is the technological environment. The third source of

uncertainty is growing demands for internationalization. In an empirical analysis, they

find that the perception of the above three sources of uncertainty is positively related

with alliance use. Key managers’ lack of faith in their ability to assess the future

potential for growth and profits in their firms’ principle industries is negatively related

with alliance use. .

Cainarca, Colombo and Mariotti (1992) analyze the relation between the technology life

cycle stage of an industry and the type and rate of different forms of technology

alliances. They argue that “propensity towards cooperation should be highest in the

introductory stage where agreements (mainly of equity nature) are used by firms to cope

with market and technological uncertainty, to lower mobility barriers and risks of sunk

cost, and to obtain high adaptive efficiency. The propensity towards agreements will then

reach its maximum value in the early development phase, owing mainly to non equity

commercial and production agreements that allow firms to gain rapid access, in step with

the high dynamics of the market, to specialized assets complementary to innovations and


5

essential for their commercial success.”(Cainarca, Colombo, & Mariotti, 1992: 60). In a

cross-sectional analysis of alliance formation in the information technology cluster

during 1990-1996, the authors find general support for their model.

Further evidence for a high level of alliance formation in an early stage of technology

evolution stems from the biotechnology industry. This industry provides a particularly

interesting context. The recent emergence of biotechnology has been characterized as a

paradigm shift (Pisano, 1988). Pisano (1989; 1990; 1991; Pisano & Mang, 1993) and

several others (Liebeskind, Oliver, Zucker, & Brewer, 1996; Powell & Brantley, 1992;

Powell, Koput, & Smith-Doerr, 1996; Walker, Kogut, & Shan, 1997) find high levels of

alliance activity typical for this industry.

A larger number of factors have been studied on the firm level. Among the variables

studied is size of the firm, age, competitive position, product diversity, financial

resources, and network embeddedness.

The relationship between age of the firm and alliance formation is somewhat unclear.

While a negative relationship has been hypothesized to the liability of newness, also

arguments for a positive relationship exist. Young firms might show higher rates of

alliance formation, as alliances with established firms might be one means to create

legitimacy (Baum & Oliver, 1991; Stuart, Ha, & Hybels, 1999).

Firm size has received attention from a large number of scholars (Burgers et al., 1993;

Gomes-Casseres, 1997; Shan, 1990). Gomes-Casseres points out that not so much

absolute size is important for the partnering behavior of small firms but rather the

relative size in comparison with direct competitors. Gomes-Casseres argues that firms

that are large compared to their direct competitors and dominate their market segment

have less incentive to seek alliances (Gomes-Casseres, 1997).

Eisenhardt and Schoonhoven (1996) argue that firms are more likely to form alliances if

they are in a vulnerable strategic position. They define strategic position through the

number of competitors, the stage of market development, and the strategy of the firm.

Stuart (Stuart, 1998) argues that crowdedness and technological prestige represent one

way to define the strategic position of the firm. Firms that compete in crowded

technology areas, that is in technology domains with many firms working on closely

related or overlapping problems, show a higher propensity to enter into alliances. Also

firms that are technologically prestigeous, show high alliance formation rates.

The strategic position of a firm can be defined as well as the resource position of the

firm. Sapienza, Autio, Almeida, & Keil (1997) argue that firms that posses resources that

provide competitive advantage are more likely to be able to enter into alliances. Firms


6

that possess resources that are rare, valuable, non-substitutable, and not easily imitable

(Barney, 1991) are more likely to be attractive alliance partners. The first three

characteristics make the firm more valuable for the partner. They also suggest that the

firm will be a more stable partner. The limited imitability of the resource or capability

reduces the threat of loosing the advantage from it.

Shan (1990) argues that firm with a high degree of product diversity are expected to form

more alliances. However she finds no empirical support for the relationship. Gulati

(1995b) finds firm liquidity a significant predictor of alliance formation.

The existing network of relationships a firm is embedded in might affect the subsequent

alliance formation. Several important arguments have been made in this respect. Gulati

(1995b) argues that it is the social context formed by the existing network of relationship

that makes the partner aware of alliance opportunities. Social networks provide

information about partners and create reputational circuits.

The social context might as well influence decision making on alliance formation. Gulati

and Westphal (Gulati & Westphal, 1999) argue that for instance the social network of

board interlocks can influence the propensity to form alliances. Walker et al. (1997)

argue that existing relationships constitute social capital for the firm. To preserve this

capital the firm has to continue and renew existing relationships. The level of social

capital a firm has build is related with the alliance formation and vice versa. While the

construct of social capital is multi-dimensional, Burt (1992a; 1992b) develops a

somewhat different argument based on the structure of the existing relationships. He

argues that different network structure provide differing benefits for the firm. Positions

that connect otherwise not connected networks might be advantageous. Thus, the alliance

formation is related to the existing network structure.

Strategic motivation for alliance formation

Within the group of studies that focuses on strategic motivations of alliances, several

authors have developed taxonomies of the motives for the formation of strategic

alliances (Glaister & Buckley, 1996; Kogut, 1988a; Oliver, 1990). For instance, (Kogut,

1988a) divides motivations to enter into joint ventures into three broad groups. The

groups are transaction cost arguments, strategic behavior arguments, and organizational

learning arguments

Later taxonomies have expanded the number of categories and have subsequently

developed more fine-grained distinctions between different alliance motivations. In this

dissertation five groups of motivations will be outlined. The groups are


7

• mandated formation

• cost minimization

• access to resources

• learning

• strategic positioning

Mandated formation Whetten (1981) refers to alliances that are formed to conform to

legal or regulatory requirements. Often, organizations are forced to enter into alliances

because of legal requirements (Oliver, 1990). International joint ventures might serve as

an example. Many international joint ventures have resulted from host country

restrictions to foreign ownership. For instance, many developing countries insist that

access to the local market can only occur in co-operation with a local partner (Beamish,

1988).

Cost arguments. In the literature about the formation of strategic technology alliances,

cost arguments have received attention. Often, the question whether to enter into an

alliance has been addressed as a make-or-buy decision. The strategic alliance is

considered as the buy option. Cost arguments can be divided into accounting-based

arguments and transaction cost arguments. For instance, Contractor and Lorange (1988)

present a cost-benefit analysis of the choice between cooperative arrangements and fully

owned investments in international business. The motivation for entering an alliance is

cost savings from the alliance. Particularly for basic research, it has been argued that the

increasing cost of innovation might be an important motivation for firms to enter into

alliances (Glaister & Buckley, 1996; Hagedoorn, 1993; Porter & Fuller, 1986).

Within transaction cost literature, alliance formation has often been analyzed in

combination with the choice of governance mode. However, it seems important to

distinguish here between institutional arrangements and the governance mechanisms

these institutions use (Hennart, 1993). Institutions include, for instance, joint ventures or

markets. In contrast, governance mechanisms include price system, hierarchy, or social

control. As Hennart points out, there is not one-to-one correspondence between the two

(Hennart, 1993). Often institutions rely on several governance mechanisms. In this

section the reason to use a particular institution will be discussed without referring to the

detailed governance structure.

Within transaction cost economics, alliances are often considered as intermediate forms

of governance that combine elements of markets and hierarchies. The basic argument of

transaction cost economics is that firms enter into alliances to economize on the


8

combination of production and transaction cost (Jarillo, 1988; Jarillo, 1990; Jarillo &

Stevenson, 1991; Madhok, 1998). Kogut (1988a) points out that integration within a firm

is connected with diseconomies of acquisition. On the other hand, the use of market

might be limited due to potential opportunism if assets are relationship specific and a

high degree of uncertainty exists (Williamson, 1985).

Osborn and Hagedoorn (1997) stress that the boundaries between the explanatory power

of different perspectives on alliances need to be delineated. Transaction costs might not

always be important. They might be more important in some alliances than in others.

Access to resources is another reason to enter into alliances. It has been mainly

discussed in resource dependence theory and the resource-based view of strategic

management. Resource dependence theories suggest that firms need to enter into

relationships because they cannot generate all the necessary resources internally (Child,

1974; Pfeffer & Salancik, 1978). Accessing external resources through inter-firm

relationships creates interdependence between the firms in the relationship. Astley

(1984) points out that cooperation might be a natural response to selection pressure from

the environment. The interdependence between organizations, that is the need to rely on

external resources, might force organizations to collaborate and to form alliances.

Resource-based theories of strategic management have extended the arguments brought

forward in resource dependence theory. Resource dependence arguments are essentially

reactive. Resource-based theories of strategic management add a proactive dimension to

firm behavior. Eisenhardt and Schoonhoven (1996) argue that firms enter into alliances

for two reasons. First, firms enter into alliances if they are in a vulnerable strategic

position and need resources from the alliance. Second, firms enter into alliances to

capitalize on their assets. Firms enter into strategic alliances because they try to generate

value through potential synergies (Madhok, 1998).

Small firm large firm alliances have been explained by synergy arguments. Rothwell

(1983) argues that small firms have advantages in innovative activities. Large firms have

resource-based advantages. Thus, alliances might give small firms access to

complementary assets that are often necessary to commercialize innovations (Hobday,

1994; Teece, 1986). Particularly in technology intensive industries such as

biotechnology, this form of strategic technology alliances has been extensively reported

(Forrest & Martin, 1992; Pisano, 1988; Pisano, 1989; Pisano, 1991; Pisano & Mang,

1993).

In the resource-based view of strategic management, the fundamental argument for

alliance formation is that firms try create and appropriate value in inter-firm relationships


9

by leveraging superior resources they posses with complementary resources (Stein,

1997). Deeds and Hill (1996) argue that strategic alliances give fast access to

complementary assets than building these assets internally. Building assets internally is

often too time-consuming and might forestall timing based advantages.

Sapienza et al. (1997) argue that motivation of a firm to leverage their internal resource

pool in external relationships will be a function of the characteristics of the internal

resources. Specifically, they argue that the more imitable the core resources of the firm

are the lower its motivation to enter into alliances.

Learning can be a motivation to enter into alliances (Badaracco, 1991; Lei & Slocum,

1992; Mowery, Oxley, & Silverman, 1996). Several authors argue that, in many

instances, firms enter into alliances to acquire new skills or technologies from the partner

(Hamel, Doz, & Prahalad, 1989; Harrigan, 1985). However, the motivation in many

alliances might be asymmetrical. While one partner enters with the goal to avoid

investments the other tries to learn new skills.

Within the resource-based literature, it has been pointed out that building new resources

and capabilities suffers from time compression diseconomies (Dierickx & Cool, 1989).

This means that a firm can only compress the time for developing a resource or

technology at the expense of disproportionately higher cost. Alliances might enable firms

to avoid some of these costs.

Kogut (1988a) argues that alliances are formed because they might help transfer of tacit

knowledge that is not easily transferred in arms-length relationships. Transferring tacit

knowledge might be easier in alliances that foster intense interaction and collaboration

(Kogut & Zander, 1992). Similarly, Müller-Stewens and Osterloh (1996) argue that the

transfer of knowledge context is often needed for successful knowledge transfer.

Alliances might enable this context transfer better than market transactions.

The learning motive of alliances has recently received increased weight. In some

industries, the convergence of formerly separate technologies requires firms to draw

upon technologies in which they have no ore only very weak capabilities (Doz & Hamel,

1997; Doz & Hamel, 1998).

Strategic postioning can be among the motives to enter into alliances (Kogut, 1988a;

McGee, Dowling, & Megginson, 1995). In a study of entry into new technical subfields

of an industry, Mitchell and Singh find that pre-entry alliances are used (Mitchell &

Singh, 1992). They argue that firms use these alliances to realize part of the value of

specialized assets and to gain information about the emerging market. Mitchell and


10

Singh argue that alliances are an important means to test technology and market

dynamics of an emerging industry subfield (Mitchell & Singh, 1992).

Positioning strategies might play a role for vertical and horizontal alliances. Doz and

Hamel argue that an alliance might be a possibility to lock a supplier into a proprietary

relationship. Burgers, Hill and Kim (1993) argue that horizontal alliances might be a

means to reduce competitive uncertainty and competitive pressure. A number of

horizontal alliances are intended to deter entry or to erode competitor’s positions (Kogut,

1988a; Varadarajan & Cunningham, 1995). Market access motives might induce the

formation of both vertical and horizontal alliances (Hagedoorn, 1993).

Standard setting alliances are another example of alliances that are motivated to improve

the strategic position of the firm. For industries that are characterized by network

externalities, it has been argued that competition might shift towards a competition

between different alliance coalitions (Gomes-Casseres, 1996; Moore, 1993; 1996).

Economists have long studied firm behavior in markets that are characterized by positive

externalities. In these industries, the utility derived from a product increases with the

number of user of this product. Typical examples include, for instance, the telephone or

personal computers. Economides and Flyer analyze standards coalitions for network

goods (Economides & Flyer, 1998). Counterintuitively, they find that for the leading

platform, the profit of firms may also increase when other firms join the platform despite

the increased competition. In other words it might be advantageous for firms to form an

alliance for setting a standard even if it increases within standard competition afterwards.

However, firms need to balance the benefits of standardization with the problems

resulting from collaborating with close competitors (Axelrod, Mitchell, Thomas, Bennet,

& Bruderer, 1995).

Kogut (1988a; 1991) has made a strategic positioning argument of a somewhat different

nature. He argues that especially technology alliances might be motivated by the motive

to develop an option in the technology area. Especially if several technologies are

competing, it might not be possible or desirable for the firm to invest in all technologies.

Rather the firm might form alliances to secure access to the technologies. The alliances

in this case take the nature of an option to expand or acquire (Kogut, 1991). Whereas

theoretically compelling, empirical evidence for the argument is mixed. Based on

somewhat weak data, for instance, Hagedoorn and Sadowski (1999) find no support for

the predicted transition from technology alliances to later acquisitions.


11

GOVERNANCE MODES OF STRATEGIC ALLIANCES

The dominant theory of governance in alliances has been without doubt transaction cost

theory. Only recently critique has been voiced from several perspectives. This section

will first outline the basic transaction cost argument for the choice of governance and

then outline some of the major critiques and extensions.

While the early transaction cost literature was restricted to the choice between markets

and hierarchies (Williamson, 1975), later work (Williamson, 1985; 1991) extended the

basic framework of analysis to included the choice between intermediate forms of

governance. However, the fundamental reasoning has remained the same. If a transaction

requires investments into transaction specific assets and if there is uncertainty about the

future the room for opportunistic behavior increases. To restrict opportunism,

hierarchical mechanisms will replace market mechanisms in organizing the transaction.

This reasoning has been frequently applied for the choice between equity and non-equity

alliances. Equity alliances are conceived as quasi-hierarchies that is, they rely more on

hierarchical governance mechanisms. Non-equity alliances are conceived as quasi-

markets relying more on market mechanisms (Osborn & Baughn, 1990; Pisano, 1989).

Several traits explain the transaction cost differences between equity arrangements and

non-equity arrangements (Colombo, 1998). Equity arrangements include joint

ownership, ex-ante commitment of resources, formation of a specialized organizational

unit with responsibility for control and coordination.

Joint ownership is viewed to align the incentives of both partners. Shared equity can be

viewed as an exchange of hostages between the parties (Williamson, 1983b). Both sides

have incentives not to decrease the value of the venture. Colombo (1998) points out, the

exchange of hostages does only partially align incentives and can be designed also in

contractual arrangements (Oxley, 1997). The argument of ex-ante commitment of

resources (Pisano, 1989) has also been criticized. Colombo points out that the

commitment of knowledge resources is difficult to value ex-ante. The probably largest

advantage of joint ventures is their superior efficiency in monitoring and conflict

resolution (Hennart, 1988; Kogut, 1988a).

The predictions of transaction cost theory have been tested in a number of empirical

studies. Results have been mixed and have led authors to consider alternative or

complementary explanations for the choice of governance in alliances.

Dyer analyzes the relationship between investments into relation-specific assets and

transaction cost (Dyer, 1997). In contrast with transaction cost economics, he identifies


12

situations in which asset specificity does not lead to increased transaction cost. He argues

that safeguards exist that help to protect against the hazards of opportunism. Based on an

exploratory study of the Japanese and US automobile industry, Dyer empirically

identifies five factors that help to explain low transaction cost despite relation specific

assets. Repeated transactions with a small set of suppliers are found to reduce transaction

costs. In transacting with that small supplier group, economies of scale and scope also

reduce transaction costs. Extensive information sharing can help to reduce information

asymmetries and thus support monitoring. Non-contractual, self-enforcing safeguards

such as goodwill or trust can support the transactions. Investments in co-specialized

assets create mutual hostage situations.

Several authors find that more complex alliances are governed through equity alliances

(Colombo, 1998; Mowery et al., 1996; Oxley, 1997; Pisano, 1989; 1990; 1991).

Transaction complexity has been operationalized through the number of partners, the

breadth of product/technology scope, and the number of functional areas involved.

Dutta and Weiss (1997) analyze the relation between firm innovativeness and the pattern

of partnership agreements. They argue that innovative firms enter into partnership

agreements that exhibit a lower risk of tacit knowledge spillover. They empirically test a

model in which they compare the probability to enter into a joint venture, a licensing

agreement, or a marketing agreement. Their results support the notion that innovative

firms try to protect their tacit knowledge by entering into technologically less close

modes of cooperation.

The findings regarding uncertainty are not supportive for the transaction cost

explanations of alliance governance. While support has been found mainly for buyer

supplier relationships (Helfat & Teece, 1987; Masten, 1984) these findings are not

indicative for alliances. Several authors find that uncertainty is related to non-equity

forms of governance in alliances (Hagedoorn & Narula, 1996; Osborn & Baughn, 1990;

Walker & Weber, 1987) rather than equity forms as transaction cost economics would

predict.

Osborn and Baughn argue that early in the technology life-cycle, firms might prefer

contractual arrangements for their flexibility (Osborn & Baughn, 1990). In technology

intensive industries, several designs might compete in this early stage. Knowledge

develops rapidly as various firms move to commercialization, consider entering the area,

or merely seek to monitor the development of a technology. Through alliances, firms

might try to position themselves in an emerging technology. Still, they may want to keep

the possibility to decide later which technologies to keep, whom to use as a supplier, or


13

how to market the product. Firms may simply seek the institutional and inter-

organizational infrastructures and become viable members of a winning network of

organizations. Only as technology stabilizes, firms might quasi-internalize through joint

venture arrangements (Osborn & Baughn, 1990).

Flexibility arguments have recently been developed into an option theory of governance

(Barney & Woonghee, 1998; Kogut, 1988a; 1991; Sanchez, 1998; Steensma, 1996b;

1997). These authors argue that the critical objective in governance choices is not

minimizing transaction cost but maintaining the value of flexibility. Non-equity

governance forms are seen to be more flexible than equity arrangements. Hagedoorn and

Osborn argue that for instance non-equity alliances might be better able to evolve in

parallel with the evolution of technology (Osborn & Hagedoorn, 1997). Sanchez (1998)

explains the empirical results by pointing out that transaction cost theory is only

concerned with the supply side uncertainty. He argues that additionally demand side

uncertainty has to be considered in governance choices. Under conditions of demand side

uncertainty, the value of flexibility needs to be weighted against the transaction cost.

This value of strategic flexibility has been modeled through real options techniques

(Myers, 1977; Sanchez, 1993; Trigeorgis, 1996).

Gulati and Singh (Gulati & Singh, 1998) argue that transaction cost arguments ignore an

important source of cost in alliances. Transaction cost arguments are mainly concerned

with the potential cost of dealing with appropriation hazards. However, an important

source of cost arises in coordination between the alliance partner. Gulati and Singh show

that coordination cost affect the governance mode choices in alliance decisions.

Coordination cost arise from the need to coordinate tasks and joint decision making that

is from interdependence between the two partners. A high level of expected coordination

cost the more likely the partners will choose an hierarchical governance mechanism.

Resource-based or competence-based theory points towards another weakness of the

transaction cost explanation of governance choice. It is only concerned with minimizing

the expected cost arising from the governance form. It assumes that governance modes

do not differ in the value that can be created through these forms (Hagedoorn, 1990).

Several other theories have tried to explain the differences in the value created through

different governance modes. Madhok and Tallman (1998) argue that firms might enter

into collaborative relationships to minimize the expected cost of development. Rather,

firms might enter relationships in the expectation to create superior value through the

combination of complementary resources and capabilities (Zajac & Olsen, 1993). Value

for the firm can be, for instance, in the leveraging of existing internal resources or


14

capabilities or in the learning of new capabilities. In this view, governance modes should

be designed to support the intended value creation. Madhok and Tallman (1998) point

out, that governance modes do differ in their value creation potential. Similarly, Osborn

and Hagedoorn suggest that the different governance modes should be considered

separate and unique entities with identifiable capabilities and limitations (Osborn &

Hagedoorn, 1997). Thus, firms would need to balance the cost of governance modes

against the value creation potential in these. Within such an approach, transaction cost

arguments and resource-based reasoning might complement one another rather than

compete (Williamson, 1999).

One difference of governance mechanisms that has received the strongest interest is

learning and knowledge creation. Governance modes are expected to differ in respect to

the organizational learning potential they provide (Sobrero & Schrader, 1998; Steensma,

1996a). Several authors have argued that the ability of participating firms to discover

knowledge and then implement it, varies according to the organizational form of the

alliance (Hagedoorn & Narula, 1996; Osborn & Baughn, 1990). Equity forms might be

more appropriate when firms seek to learn and transfer tacit knowledge back to the

parent firm (Osborn & Hagedoorn, 1997). Organizational learning in alliances depends

on shared cognition (Walsh, 1995). The formation of shared cognition in organizations

takes place through challenges posed by a firm’s environment, sociopolitical processes

within the firm, and changes in key decision makers’ values and assumptions (Lyles &

Schwenk, 1992; Walsh, 1995). Often, these cognitive structures manifest themselves in

organizational cultures (Sackmann, 1992) and organizational language (von Krogh &

Roos, 1995). Shared cognition between organizations requires information and

knowledge exchange to build shared interpretations and joint language. The process

described here requires intense interaction between the alliance partners. Joint ventures

might have advantages due to the greater amount of interaction (Osborn & Baughn,

1990). On the other hand, non-equity arrangements might provide a more effective

environment for discovery of new knowledge due to the greater flexibility they offer

(Osborn & Hagedoorn, 1997).

Two more important limitations of transactions cost explanations of governance choice

have been criticized. The first criticism is that transaction cost economics is essentially

an asocial theory (Granovetter, 1985). The second criticism is that transactions cost

explanations are static (Hennart, 1988).

Granovetter argued that transaction cost economics ignores an important aspect of

economic behavior, namely its social embeddedness (Granovetter, 1985; 1992). While


15

economic rationales play an important role for economic activities, this activity is taking

place in a network of social relationships and might be at least partially motivated by

non-economic goals such as approval, status or power. As Granovetter (1985) argues,

transaction cost arguments overestimate the power of “rational” control mechanisms over

the power of social control mechanisms. Ghoshal and Moran extend this criticism

(Ghoshal & Moran, 1996). They argue that Williamson’s treatment of opportunism leads

to sub-optimal decisions if applied on normative decisions.

Studies that have examined the effects of social ties on the governance of alliances have

pointed toward the importance of trust (Gulati, 1995a). Trust can act as a safeguard that

decreases the “propensity towards opportunism”(Nooteboom, 1996; Nooteboom, Berger,

& Noorderhaven, 1997). Nooteboom et al., (1997) find that trust reduced the perception

of risk in the form of the perceived probability of loss. McAllister analyzes antecedents

of interpersonal trust (McAllister, 1995). He distinguishes between cognition and affect

based trust. Based on a structural equation model he finds that affect based trust is

influenced by cognition based trust, interaction frequency and peer affiliative citizenship

behavior. On the firm level, Gulati (1995a) argues that firms which have developed trust

in previous relationships, rely less on hierarchical governance mechanisms. In ongoing

relationships, firms gradually replace formal governance mechanisms through social

control as trust is built (Ring & Van de Ven, 1994).

The concept of social capital has been proposed as an additional constraint for firm

opportunism and governance choice (Keil, 1998). As firms cooperate in inter-firm

relationships, social capital (Bordieu, 1986; Coleman, 1988) is build between the

partners. The level of social capital built in previous relationships is not only a resource,

but it likewise poses expectations on a partner and limiting the partner’s variety of

acceptable actions (Walker et al., 1997). Also in this stream of literature it is argued that

social control replaces contractual mechanisms (Ghoshal & Moran, 1996). Powell (1990)

stretches this point even further. He argues, that alliances are a form of governance that

is not intermediate between markets and hierarchies. Rather, alliances are characterized

through social governance mechanisms that are unique to these institutional forms.

Notions of trust and social capital also stress the dynamic nature of governance choice.

Transaction cost explanations of governance choice neglect the history of transactions

that any transaction is embedded in (Gulati, 1995a). They ignore the possibility of

repeated alliances and the emergent processes resulting from prior interactions between

partners. These processes may alter the calculus when firms are choosing governance

modes in alliances (Gulati, 1995a). In an analysis of alliances in biopharmaceuticals, new


16

materials, and automotives, Gulati (1995a) finds that the larger the number of prior

alliances, the smaller the propensity to use equity based governance modes. This holds

especially true for prior equity-based alliances. The finding support the argument that

prior alliances might make it unnecessary to take mutual hostages in equity based

alliances.

Additional dynamic processes might affect the choice of governance modes in alliances.

In some instance, decisions might be not the outcome of a rational evaluation process but

rather applications of an existing routine to a situation whether appropriate or not1.

Routines form through previous operating experience (Nelson & Winter, 1982). They

might constrain actions by acting as perceptual filters. In the same vein, Powell argues

that firms build up skills at forming external relationships (Powell, 1998). Knowledge

how to cooperate means that information is filtered by a specific context, by experience,

and by interpretation. The knowledge and skills that were built up influence the variety

of design choices the firm has (Penning & Harianto, 1992).

Not only routines can limit the degrees of freedom for the firm. Few research and

development outsourcing decisions are made “from scratch”. Over time, the governance

of transactions may become inseparably linked with the governance of other transactions

in which the firm is already engaged (Argyres & Liebeskind, 1998). For instance,

ongoing supplier relationships might exist and need to be taken into consideration.

Existing relationships might suggest keeping an activity with an external supplier rather

than internalizing them to avoid endangering sunk costs (Keil, 1998) or incurring

additional cost of resolving the existing contracts (Argyres & Liebeskind, 1998). The

cost of actually resolving partnerships has been studied mainly from the transaction cost

perspective. Sunk costs include, for instance relationship specific tangible resources, but

also the time spent on learning to collaborate with the particular partner. Existing

commitments to governance modes might also limit the degree of freedom with other

parties. Existing alliances with one firm might, for instance, forestall the formation of a

closer alliance with a third party. As previously argued, the cumulative nature of

knowledge development might also lock firm into a relationship. Knowledge

accumulates in the firm that carries out the research and development activity. Part of

this knowledge is tacit and can only with great difficulty be transferred across firm

boundaries (Kogut & Zander, 1992; 1993). Tacit knowledge often requires intense

collaboration (Steensma, 1996a) to be transferred and thus governance modes that allow

1 This proposition has been made by authors in evolutionary economics (Nelson & Winter, 1982) and

organizational evolution (Stuart & Podolny, 1996) alike.


17

for intense interaction. This argument suggests that within a knowledge trajectory, firms

might only gradually be able to change from one governance mode to another.

Two authors have empirically analyzed persistence in the use of governance modes up to

this point. The findings of these studies are contradictory. In a multi-industry study,

Steensma finds support for the hypothesis that experience with particular governance

modes is related to the continued use of this governance mode (Steensma, 1997). In

contrast, Pisano (1990) does not find a significant influence of the sourcing history of the

firm. However, Pisano’s results might be industry specific. Pisano analyzes

pharmaceutical firms after the emergence of the biotechnology paradigm (Pisano, 1988).

He tested whether sourcing patterns in large pharmaceutical companies persist over

paradigm changes. It is probable that the radical nature of the change might have caused

the firms to break with their routines. This interpretation is supported by the study of

Powell et al. (1996). In a study of new biotechnology firms2 they found that firms persist

in using collaborative agreements. They conclude that the firms develop considerable

absorptive capacity, skills in managing collaborations, as well increased awareness of

new projects and reputation as a reliable partner. These benefits make it more probable

that firms persist in their behavior of entering into collaborative research and

development. The interpretation that firms persist in their routines until a dramatic

change forces them to reconsider these routines is also in line with punctuated

equilibrium models of organizational change (Gersick, 1991; Haveman, 1992; Romanelli

& Tushman, 1994).

Transaction cost theory does not only ignore the history of transactions but also the

future. The assumption is that in every transaction opportunism will arise independent of

the effects this has on future transactions. Hill argues that transaction cost economics

overstates the risk of opportunism in transactions (Hill, 1990). He argues that the market

mechanism selects against actors that behave opportunistically. In the long run, firms

that behave opportunistically will not be able to find new collaboration partners because

of their reputation. Hill constructs a game theoretic model that shows that in infinitely

repeated games, cooperation pays off. However, Hill points out that in some

circumstances, opportunism pays. Opportunism might be a viable strategy if the future is

not important, if reputation is difficult to establish, if opportunism cannot be detected, if

2 New biotechnology firms are firms that have been founded for the purpose of researching and

developing new products that exploit biotechnology (Liebeskind et al., 1996). Powell and Brantly(1992) argue that these firms have emerged due to the fact that biotechnology was a competence-destroying innovation for established firms in client industries such as chemicals andpharmaceuticals. Incumbent firms lacked an understanding of biotechnology and thus used the newbiotechnology firms to get access to biotechnology.


18

the returns from opportunism now outweigh the future returns, or if the market efficiency

in selecting against opportunistic firms is insufficient.

DEVELOPMENT PROCESSES OF STRATEGIC ALLIANCES

While factors affection alliance formation and governance have received abundant

attention, the dynamic processes that underlie individual alliances have received

relatively scant attention (Gulati, Khanna, & Nohria, 1994; Sobrero & Schrader, 1998).

This is the more surprising, as already Harrigan (1985; 1986) showed that the alliances’

evolution paths can have significant consequences for alliance performance.

Process studies of alliances can be organized along the life cycle of an alliance. This life

cycle can be divided into formation, operation and termination phase of the alliance

(Kogut, 1988b). Most studies focus on one part of this life-cycle, such as the formation

phase of the alliance (Larson, 1992), or the operation phase (Doz, 1996). Some studies

try to link the transition between phases (Ariño & de la Torre, 1998). Most process

studies are based on in-depth clinical studies of selected cases (Gulati, 1998).

Larson (1992) is among the first researchers that argue for the importance of

understanding process of alliance and network formation. Based on several in-depth case

studies, Larson suggests a three phase model of the formation of network dyads. This

model is depicted in Figure 1. The first phase of alliance formation captures the time

before the alliance formation. In line with social network views of alliances (Gulati,

1995b), Larson (1992) argues that personal and firm reputation, as well prior

relationships affect the firm’s decision to enter into an alliance. These factors are

instrumental to reduce uncertainty and to support the formation of expectations and

obligations between the partners. The level of cooperation in the early phase of the

alliance is related to these factors.


19

Phase I: Preconditions for Exchange History:•Personal reputations

•Prior relations•Firm reputations

•Reduced uncertainty•Expectations and obligations•Enhanced early cooperation

Phase II: Conditions to build:•Mutual economic advantage

•Trial period•One firm is initiator

Engagement•Rules & obligations•Clear expectations

•Reciprocity•Trust

Phase III: Integration & control•Operational integration

•Strategic integration•Social control

Figure 1 A process model of the formation of entrepreneurial dyads (Larson, 1992)

In the cases Larson describes, each relationship developed from more arm’s-length

relationships into close relationships that encompassed operational, and strategic

integration. The second phase describes how the alliances developed into increased

engagement of both parties. In Larson’s (1992) view, instrumental for this development

mutual economic advantage is use of trial periods, and the existence of an initiator.

Through the trial period, initial structures are formed. These evolve into closer

integration as the alliance develops into a more stable form over time.

Several frameworks have extended the work of Larson (1992). Ring and Van de Ven

develop a process framework for the evolution of cooperative inter-organizational

relationships (Ring & Van de Ven, 1994). In their view, “the ways in which agents

negotiate, execute, and modify the terms of an IOR [inter-organizational relationship]

strongly influence the degree to which parties judge it to be equitable and efficient”(Ring

& Van de Ven, 1994: p. 91).

The process framework that Ring and Van de Ven (1994) develop consists of a repetitive

cycle of negotiations, commitments and executions. Each of these stages is assessed in

terms of efficiency and equity. Central to Ring and Van de Ven’s theory is the concept of

equity. They argue that equity is to be understood as fair dealing rather than equal

division of inputs and or outcomes at all stages. This brings this concept close to the

ideas of procedural justice that has been discussed extensively in strategic decision

making (Kosgaard, Schweiger, & Sapienza, 1995).


20

Similar to Larson (1992), Ring and Van de Ven (1994) argue that most inter-

organizational relationships emerge incrementally. They often start out with small,

informal deals. The parties might only engage in more risky cooperative projects, if these

transactions succeed. In this process, personal relationships increasingly supplement the

organizational roles of individuals in the relationship. However, through personnel

turnover these relationships can easily be lost.

Ring and Van de Ven (1994) propose that psychological contracts rather than formal

contracts increasingly govern relationships, as firms develop experience in dealing with

each other. The increased social governance of the relationship makes the dissolution

more unlikely. Only if commitments are violated, the parties might resort to more formal

structures. It is interesting to note that the framework of Ring and Van de Ven focuses

mainly on socio-psychological processes that complement the more formal processes in

organizations. The development of formal structures such as the interface between the

partners or the degree of goal accomplishment is only touched upon. The process

framework of Ring and Van de Ven (1994) is depicted in Figure 2.

Assessmentsbased on

efficiency

equity

Negotiations

of joint expectationsrisk& trust through

formal bargaining

informal sense making

Commitments

for future action through

formal legal contract

psychological contract

Executions

of commitments through

role interactions

personal interactions

Figure 2 Process framework of the development of cooperative inter-organizational

relationships (Ring & Van de Ven, 1994)

The model of Ring and Van de Ven (1994) has been complemented by related more

economics oriented work. Some of this work focuses how initial conditions influence the

development of alliances (Doz, 1996; Gulati et al., 1994). Gulati et al. (1994) argue that

the perception of pay-off structures is important to understand why alliance partners

might cooperate or why they might try to unilaterally influence alliance outcomes. This


21

argument applies and extends previous game theoretical analyses of cooperative behavior

(Axelrod, 1984; Parkhe, 1993). In related work, Khanna et al. (1998; Khanna, 1998)

argue that the relative scope of the alliance compared to the scope of the partner firms

influence the benefits that accrue to the partners. The distribution of benefits is seen to

influence the cooperative and competitive dynamics of the alliance.

Doz (1996) points out that the outcomes of alliances are not solely determined by the

initial conditions. Rather, alliances go through sequences of learning, reevaluation, and

readjustment. Initial conditions are viewed to set the stage by either fostering or blocking

learning in the alliance. Doz argues, that often “early ‘small’ events in an alliance have a

disproportionate importance in establishing, or not, a self-reinforcing cycle of heightened

efficiency expectations, greater institutional and personal trust and commitment, joint

sense-making and learning, and greater flexibility and adaptability” (Doz, 1996: p 77).

The process model that Doz (1996) develops is depicted in Figure 3.

Revised conditions•Task definition•Partner’s routines•Interface structure•Expectations of

–performance–behavior–motives

Re-evaluation•Efficiency•Equity•Adaptability

Learning•Environment•Task•Process•Skills•Goals

Initial conditions•Task definition•Partner’s routines•Interface structure•Expectations of

–performance–behavior–motives

Leads to readjustment

Allows

Facilitate orhamper

Figure 3 Process of alliance evolution (Doz, 1996)

Kumar and Nti (1998) integrate the social and economic view of the evolution of

alliances. They argue that firms evaluate the outcomes of the alliance activity in the light

of expectations. Also the pattern of interaction between the firms is evaluated to be either

fair or unfair. Discrepancies in either dimension influences through a feedback loop the

future action of the partners.

The notion of change in the alliance evolution warrants further explanation. Several

authors have pointed out that alliances cannot be conceived as static but rather evolve

over time. For instance, Levinson and Asahi (1995) argue that alliances have their own

life cycles during which they go through several changes. For joint ventures, several


22

studies (Gray & Yan, 1997; Harrigan & Newman, 1990) argue that the joint organization

and the underlying relationships between firms can be expected to go through cycles of

stability and upheaval similar to predictions of punctuated equilibrium models of

organizations (Tushman & Romanelli, 1985). While dysfunctional in some cases,

Lorange (1990) argues that the evolutionary nature of alliances can be core strength of

the institutional arrangement. Alliances can be a vehicle to respond to new adaptive

challenges from the environment.

Underlying causes for the change in alliances can be found both within the partnering

organizations and in their environment (Ring & Van de Ven, 1994). Some authors argue

that alliances change due to shocks from the external environment (Ariño & de la Torre,

1998; Doz & Shuen, 1995; Khanna et al., 1998). Forces such as deregulation or

technological change are conceived to induce change in existing alliances. However,

change can result also from within the organizations involved within the alliance.

Fombrun (1986) argues that also discontinuous change can result from within the

organization. Reason for this discontinuous change is contradiction on different levels of

structure in the relationship. Fombrun conceptualizes organizational as well as inter-

organizational structures on three levels. Infrastructure defines the underlying map of

interdependencies in organization. Socio-structure encompasses the administrative

structure and the social architecture of exchange. Super-structure describes the symbolic

representations and interpretations of collective life. Fombrun (1986) points out that

these structures are not static but evolve over time. Over time contradiction develops

between the different levels fueling transformation of the relationships. Koza and Lewin

(1998) argue that alliances should be conceived as part of the strategic portfolio of the

firm. Therefore changes in the strategy of the firm are likely to induce changes in

existing alliances.

On a more detailed level, learning processes might trigger change in alliances (Bureth,

Wolff, & Zanfei, 1997; Doz, 1996; Doz & Shuen, 1995; Hamel, 1991). Bureth, Wolff

and Zanfei (1997) argue that learning has two possible effects on the stability of

cooperation. Learning by cooperating might increase the stability of the relationship.

Commitment is necessary to enable learning in the relationship. The learning might also

be reinforcing the commitment by creating relationship specific assets. However,

learning by cooperating might induce as well instability of alliances. The knowledge

learned in the collaboration might reduce the incentive to further cooperate (Van de Ven

& Walker, 1984). During the cause of the partnership the partners might start using the

learned knowledge competitively. In a similar vein, Parkhe points out that the partner

that learns the fastest, tends to dominate an alliance (Parkhe, 1991). Hamel goes so far to


23

describe alliances as learning races between the partners (Hamel, 1991; Hamel et al.,

1989).

Similar to the effect of learning in alliances Alter describes the effect of conflict. She

argues that conflict is “a necessary component of the inter-organizational developmental

process whereby information is shared, roles and functions clarified, and disagreement

over objectives and methods mediated” (Alter, 1990: p. 497). However conflict is

dysfunctional if it cannot be resolved and alliance partners resort to unilateral reactions.

This might trigger a diverging cycle of reactions that ultimately leads to the termination

of the relationship (Ariño & de la Torre, 1998).

Fichman and Levinthal (1991) discuss the processes that lead to the termination of inter-

organizational relationships. They propose that a liability of adolescence exists for inter-

organizational relationships. They argue that most relationships start with a stock of

assets such as previous trust, goodwill, financial resources, or commitment. This asset

stock might reduce the risk of dissolving the relationship even in the face of unfavorable

initial outcomes. However, after an initial “honeymoon” period, this stock of assets

might not suffice and the probability of dissolving is expected to rise. Relationships that

have survived this period of adolescence face better prospects to be continued because in

the cause of time, relational assets are build up (Fichman & Levinthal, 1991). Fichman

and Levinthal point out that trust, goodwill, and positive prior beliefs are a form of social

capital and do not suffer from depreciation. They facilitate exchange relationships. Aside

from buffering organizations from early selection pressures, Fichman and Levinthal

point out that this social capital might also be the basis to build further social capital thus

creating a vicious circle. In a sample of auditor-client relationships, Seabright, Levinthal,

& Fichman (1992) empirically analyze the dissolution of inter-organizational

relationships. They find that the change in the resource fit provides impetus for the

dissolution of relationships. However this impetus is countered by individual and

structural attachment between the exchange partners thus giving weight to social capital

arguments.

PERFORMANCE OF STRATEGIC ALLIANCES

Performance of strategic alliances has received only insufficient weight in the alliance

literature. Part of this lack of studies might have its cause in the difficulty to measure

performance constructs. Brockhoff and Teichert (1995) point out that in alliances,

performance measurement is extremely difficult for several reasons. First of all, several

groups of objectives exist. Further, alliances can be analyzed on different levels of

analysis. For instance, one can analyze the success, on the project, on the relationship, or


24

on the firm level. While a relationship might be successful if analyzed on one level,

results might change if analyzed on a different level of analysis (Osborn & Hagedoorn,

1997). Therefore, objective performance criteria such as the longevity of a relationship

are too restricted to reflect if an alliance has achieved its aims (Glaister & Buckley,

1998). Mitchell and Singh (1996) further support the argument that many performance

analyses carry important shortcomings. Often the influence on corporate performance is

used. This might conceal business unit level influences. If performance is measured by

profitability the results might be biased because the sample is limited to firms that

survived.

Longevity is one of the performance criteria that have dominated early research on

alliances. For instance, Parkhe argues that longevity is an indicator of success (Parkhe,

1991) for many alliances. Several other studies (Fichman & Levinthal, 1991; Harrigan,

1986) have employed termination of alliance as a performance criterion. These studies

have provided valuable insights. However, several authors warn (Gomes-Casseres, 1987;

Gulati, 1998; Saxton, 1997) not to equal alliance termination with failure. Alliances that

have reached their strategic objective might be terminated and still be considered a

success. Often alliances are entered into for a limited time period or for reaching a

predetermined objective. Especially in the latter case, termination might be a sign of

success rather than failure.

Despite the difficulty to measure performance of alliances, several studies have reported

rather mixed results of alliance activity with failure rates ranging from 50-80% (Bleeke

& Ernst, 1993; Geringer & Herbert, 1991). In a significant number of alliances, at least

one partner shows dissatisfaction with the alliance results. Khanna, et al. (1998) argue,

that part of this dissatisfaction might be the result of our insufficient understanding of the

dynamics of alliances. Also Borys and Jemison point out that the value creation

mechanisms are often ill understood by managers (Borys & Jemison, 1989:p 241). One

might add that scholarly understanding is lacking as well. This is further underlined by

the fact that despite the reported high failure rate, high rates of alliance formation

continue. A more fine-grained analysis of the benefits and drawbacks of this mechanism

might be called for. As Hagedoorn and Schakenraad argue, the effect of technology

partnering on profitability might be very well an indirect one (Hagedoorn &

Schakenraad, 1994). In addition, performance might be asymmetrical with one party

considering the alliance successful while the other party perceives the alliance

unsuccessful (Hamel, 1991; Khanna, 1998; Khanna et al., 1998).


25

Some of the potential benefits of alliances have been discussed already under the motives

for alliances. To complete this discussion, potential negative performance consequences

should be discussed. Kotabe and Swan (1995) find a negative relationship between

cooperation and the innovativeness of introduced products. They argue that the firms

have to trade innovativeness for establishing communication, coordination, and trust

with an alliance partner.

Bleeke and Ernst point out that many strategic alliances evolve into the divestment of the

business unit involved in the alliance. Reason for this transformation is according to the

authors insufficient assessment of the risks in the alliance (Bleeke & Ernst, 1995). Hamel

et al. (1989) warn of the risk of knowledge leakage in alliances. Often, one partner enters

with the goal to avoid investments while the other tries to learn new skills. To avoid

being outlearned by the partner, companies must take steps to limit the transparency of

their skills. If both partners enter into a relationship with learning goals, the alliance can

degenerate into a learning race. In this case, the partner that learns the fastest, tends to

dominate the relationship (Parkhe, 1991).

Even if the shortcomings above can be avoided, an optimal number of alliances might

exist. Beyond this optimal number of alliances the costs might outweigh the benefits

(Deeds & Hill, 1996). Several factors might influence this point. First, at some point,

additional alliances might make only marginal contributions. Second, also learning

within alliances might exhibit diminishing returns. Third, the management burden might

increase beyond a manageable size with an increasing number of alliances. As a result,

management’s ability to properly scan alliances might not suffice.

Aside from the performance of alliances, also factors contributing to their success have

been investigated. In a longitudinal study of 98 alliances, Saxton (1997) finds partner

reputation to be positively related to the perceived success of the alliance. Prior

affiliation is only linked with initial satisfaction but not with the longer term success.

This finding is interpreted in the light of March’s distinction between exploration and

exploitation (March, 1991). Alliances with known partners might be more exploitative.

Alliances with new partner might be more explorative. Other success factors in alliances

are the choice of partners, the partnership structure, sufficient time for relationship

growth, open lines of communication, and a trustworthy corporate culture (Hunt &

Morgan, 1994).

Mitchell and Singh critically review the use of collaborative arrangement for the

commercialization of complex goods (Mitchell & Singh, 1996). They argue that there are

benefits as well as problems. In the commercialization of complex goods, they find a


26

positive relationship between the use of collaborative arrangements and survival.

However, their results suggest also that in some instances collaboration might lead to

adaptation problems. If environmental change occurs in the focus of the collaboration,

the relationship might cause inertia to change (Mitchell & Singh, 1996).

Several authors have identified potential problems and challenges that might lead to

failure in alliances. For new ventures, McGee et al. (1995) find that lack of experience in

the area of cooperation is associated with lower performance of the venture. This finding

is particularly strong for research and development cooperation. In some of these

relationships the venture might loose more than it gains. Harrigan (1995) points out that

many alliance failures can be attributed to compatibility problems between the firms.

These might include partners of unequal size, alliance experience, or managerial style.

Other incompatibilities include staffing errors and the lack of participatory management.

Bidault and Cummings (1994) point out that problems encountered in alliances might

offset or eliminate expected advantages. Several challenges for technology partnerships

can be identified. Challenges include to find a mutually acceptable champion for the

joint project poses problems. The co-sponsorship necessary often causes problems. The

necessary flexibility for innovation projects is often difficult to retain in a partnership.

Information exchange necessary for innovation projects is difficult to achieve or

unwanted in a partnership. Appropriability often causes problems in partnerships. Lam

argues that the friction that often arises in technology partnerships is due to the

differences in the knowledge architectures of the partnering firms (Lam, 1997). She

argues that knowledge is socially embedded. Therefore, firms differ in their knowledge

architectures. Brockhoff (1992) finds that high levels of perceived transaction costs are

related to low levels of perceived success of the cooperation.

ALLIANCE CAPABILITIES

Several authors have proposed elements of a firm’s capability to manage alliances (Doz,

1996; Dyer & Singh, 1998; Harbinson & Pekar, 1998; Lorenzoni & Lipparini, 1999;

Powell, 1998; Simonin, 1991; Simonin, 1997; Westney, 1988). However, only recently

(Dyer & Singh, 1998; Harbinson & Pekar, 1998; Lorenzoni & Lipparini, 1999; Simonin,

1997), first attempts have been made to integrate these elements into a more complete

picture.

One of the first discussions of the firm’s capabilities to manage alliances can be found in

Westney (1988). Focussing on learning alliances, she argues that two fundamental

capabilities need to be learned. First, firms need to learn managing the relationships


27

between the partners. Second, they need to learn to transfer of what has been learned in a

cooperation into the firm. In a recent article, Gulati (Gulati, 1999) focuses on capabilities

that support alliance formation. He argues that separate organizational units and

standardized procedures including clarified decision making authority, project

guidelines, legal frameworks, decision checklists, constitute building blocks of an

alliance capability.

Pucik (1991) analyzes the capability to learn from alliances in more detail. He identifies

barriers to learning. These barriers are linked to functional areas of alliance management.

The functional areas are strategic planning, human resource planning, management

development, and control systems.

Harbison and Pekar (Harbinson & Pekar, 1998) argue that alliance capabilities evolve

over time. While firms start out with ad-hoc practices, slowly firms start to

institutionalize capabilities. Institutionalization takes place through formalization of

procedures, dedicated staff and the establishment of knowledge repositories. Especially

capturing and disseminating best practices play a crucial role in this process.

Dyer and Singh (1998) present a more integrated view of alliance capability. They start

out from the question how firms earn rents through collaboration. Dyer and Singh argue

that firms earn rents in collaborative relationship from four sources. The sources for

relational rent are

• relation-specific assets

• knowledge sharing routines

• complementary resources and capabilities

• effective governance

Based on Williamsson’s transaction cost theory (Williamson, 1985), Dyer and Singh

(1998) argue that firms can gain productivity advantages when it is willing to make

relationship specific investments. Site specificity, physical asset specificity, and human

asset specificity can be related to improved performance for the partners in the

relationship (Dyer, 1997). An important aspect of this source of relational rents is that it

is relationship specific. Part of the alliance management capability might be partner

specific. This is in line with the findings of Boari and Lomi (1998). For the alliances of

an Italian aerospace company, they find that learning is mostly alliance specific and

cannot be easily transferred to other relationships. Similarly, Lane and Lubatkin (1998)

argue that in an alliance, the firm’s ability to learn from its partner is relationship

specific.


28

Inter-firm knowledge sharing routines are the second source of relational rent (Dyer &

Singh, 1998). It is generally accepted that customers (von Hippel, 1988), suppliers

(Hagedoorn, 1993), and horizontal alliance partners (Florin, 1997; Hamel et al., 1989;

Helleloid & Simonin, 1994; Larsson, Bengtsson, Henriksson, & Sparks, 1998; Osland &

Yaprak, 1995) can be an important source of knowledge. Especially in technologically

dynamic industries, such as biotechnology, participation in learning networks might be

imperative to maintain competitiveness (Liebeskind et al., 1996; Powell et al., 1996).

However, relational rents through knowledge sharing are not created automatically (Dyer

& Singh, 1998). Both knowledge and information are often context dependent and not

easily transferred across firm boundaries (Kogut & Zander, 1992; Lam, 1997; Zander,

1991). This difficulty to transfer knowledge is what gives those firms competitive

advantages that are able to do so.

Several authors have identified determinants of the capability to transfer and create

knowledge in alliances. Inkpen analyzes knowledge management practices in the context

joint ventures (Inkpen, 1995; Inkpen & Crossan, 1995; Inkpen & Dinur, 1998). Inkpen

and Dinur (1998) argue that the firm needs to be able to manage four key knowledge

processes. The knowledge processes are technology sharing, alliance-parent interaction,

personnel transfers, and strategic integration. However, some of these processes are joint

venture specific. For instance, alliance-parent interaction is only relevant if a separate

organizational entity is created as in the case of joint ventures.

One determinant of a firms ability to learn from an alliance is its absorptive capacity.

Cohen and Levinthal (1989; 1990; 1994) find that the ability to absorb outside

technologies is related to internal research and development activities of the firm in

related areas. Creating related knowledge through internal research and development

helps to identify appropriate technologies, to assimilate, and to apply them. The internal

research and development efforts have two functions within this process. On the one

hand, the understanding of knowledge is supported by related internal efforts during the

search, assimilation, and application of knowledge. On the other hand, the research and

development can create complementing knowledge that are necessary to exploit external

knowledge and technologies (Granstrand, Bohlin, Oskarsson, & Sjöberg, 1992;

Granstrand & Sjölander, 1990a; 1990b). Cohen and Levinthal identify several variables

and processes supporting the absorptive capacity of a firm. First, the relatedness of the

knowledge produced by the internal activities affects the ease to internalize external

knowledge. The less related the knowledge the firm possesses the more difficult it is to

understand and assimilate the external knowledge. The intensity of effort is a second

variable relating to the absorptive capacity. The more extensive the effort of a firm, the


29

higher the probability that internalizing the knowledge succeeds. While relatedness is

important to understand the knowledge, too close relatedness is undesirable. The more

two organizations’ knowledge domains overlap, the smaller is the amount of knowledge

that is not yet in the possession of the organization that tries to learn. Thus, the potential

learning is decreasing when if the knowledge bases overlap too much.

The knowledge to be internalized has to be accepted. Knowledge has a strong social

component. Knowledge coming from outside of the company is often not considered as

valuable or even threatening. To overcome this "Not-Invented-Here" syndrome, an

organizational culture (Schein, 1996) has to be created that allows to challenge the

existing culture. To introduce a culture receptive to outside technologies is not a simple

task. Cultural knowledge, values, and beliefs conflicting with the integration of outside

technology are often tacit and cannot easily be altered or replaced.

Absorptive capacity can be understood as a firm specific or as a relationship specific

capability. While Cohen and Levinthal stress the firm specific component of absorptive

capacity, Lane and Lubatkin (1998) as well as Dyer and Singh (1998) focus on the

relationship specific component. They point out that firms are not equally able to

develop effective knowledge assimilation with all partners. Partner-specific absorptive

capacity might be partially a function of effective knowledge sharing routines between

the partner. It might also be a function of similar or dissimilar ways knowledge structures

within the organization (Lam, 1997). For instance, Hedlund and colleagues (Hedlund &

Nonaka, 1993; Hedlund & Zander, 1993) identify different models how knowledge is

stored and managed in Western and Japanese firms.

Knowledge sharing routines should also be important for the joint creation of new

knowledge. Alliances in research and development often aim at creating knowledge that

is new to all participants (Florin, 1997; Lubatkin, Florin, & Lane, 1998). Even though

this often requires the transfer of existing knowledge as a prerequisite, the creation of

new knowledge includes conceptually different elements. For instance, creating new

knowledge includes outcomes that are often much more uncertain to determine (Lubatkin

et al., 1998). Thus, the potential for opportunism is higher. Being able to provide

incentives for both firms and to manage the balance between cooperation and

competition (Larsson et al., 1998) would seem important abilities.

In Dyer and Singh’s (1998) framework, the third source of relational rents is leveraging

the resources and capabilities of the alliance partner. This requires the resources to be

complementary. If two competencies are complementary they do not only fit together but

they are increasing each other values beyond the stand-alone value. To realize the


30

potential of a competence, complementary competencies are required (Teece, 1986). In

industries that exhibit rapid change in the technological environment, even large firms

rarely are in the position that they posses all assets and capabilities in a business area

(Doz & Hamel, 1997). Alliances can be a way to combine for instance new technology

with the existing market access of a firm. To earn rents from leveraging internal

resources with complementary resources, the firm needs the ability to evaluate the

complementarity of a partner’s resources. Dyer and Singh (1998) argue that three factors

influence the firm’s ability to assess external partners. The reasons are differences in the

alliance experience, differences in the search and evaluation capability, and differences

in their position in information network.

The analysis of complementarity should not be restricted to analysis of strategic fit.

Several authors have pointed out that organizational fit might be might be equally

important. The firm’s capability to gain rents based on complementary resources and

capabilities can be expected to depend also on the ability to integrate organizational

elements such as decision making, information and control systems or culture (Doz,

1996; Doz & Hamel, 1998; Kanter, 1994; Madhok & Tallman, 1998).

In Dyer and Singh’s (Dyer & Singh, 1998) framework, the fourth source of relational

rents is effective governance. The authors argue that some firms are superior in their

ability to design governance structures that minimize transaction costs. Particularly,

governance modes that do not require third parties for enforcement are viewed to be

superior.

Self-enforcing agreements are distinguished into agreements that rely on formal

mechanisms and agreements that rely on informal mechanisms. Within the transaction

cost literature mainly formal mechanisms such as economic hostages are discussed

(Pisano, 1989; Williamson, 1983a). The function of these arrangements is to align the

incentives of the contraction parties and thus to reduce the propensity for opportunism.

Informal mechanisms are the second group of mechanisms. Instruments such as

reputation, trust or social capital fall into this group. The underlying logic for these

mechanisms is that economic control is replaced by social control (Ring & Van de Ven,

1994). Especially in situations of high market or technological uncertainty, social control

mechanisms might replace economic control mechanisms (Podolny, 1994). Especially

when room for opportunism is potentially large, it might be less costly to rely on social

control mechanisms than trying to devise complete contracts (Dyer & Singh, 1998).

Several empirical studies have found evidence that the use of social control mechanisms


31

can be related to reduced transaction costs (Dyer, 1997; Nooteboom et al., 1997; Zaheer,

McEvily, & Perrone, 1998; Zaheer & Venkatraman, 1995).

The first empirical examination of alliance management capabilities stems from Simonin

(Simonin, 1997). He discusses know-how that is related to how effectively new

collaborations are entered and managed. He divides this know-how along four phases of

a collaboration cycle. The first phase covers identifying and selecting alliance partners.

For this phase, Simonin draws from the work of Geringer (1991). He argues that firms

need to be able to

• evaluate if partners are able to provide the benefits sought

• evaluate the strategic implications of partner choice

• assess the partners capabilities

• evaluate the likely responses of partners to external contingencies

While extensive, this list is far from comprehensive. For instance, several authors

(Hamel, 1991; Hamel et al., 1989; Pucik, 1991) have pointed out that being able to

understand the partners strategic intent can be critical to avoid being outlearned. Also

organizational fit might be critical when assessing potential alliance partners. As often

stressed in the acquisition literature (Buono & Bowditch, 1989) the operational

integration may very often depend on fit of organizational culture or systems.

The second phase covers negotiating the terms and structure if the agreement (Simonin,

1997). It requires the ability to evaluate legal, tax, and financial implications of different

collaborative forms and structures. Again Simonin’s discussion would seem incomplete.

Different governance structures might have strategic implications. Learning in a strategic

alliance is often influenced by the degree of interaction. Different governance structures

exhibit large variance in the opportunities for interaction they provide. This can

translates into differences in the learning opportunities that the alliance provides

(Sobrero & Schrader, 1998; Steensma, 1996a). Keil (1998) argues that governance

modes might lead to different levels of social capital. Social capital might be important

when contractual control might only partially applicable due to the difficulty to devise

complete contracts. The choice of governance modes certainly also affects the incentives

for different parties (Grossman & Hart, 1986; Hart, 1991; Hart, 1995). In summary, the

negotiation and structureing phase might have more strategic implications than Simonin

(1997) proposes.

The third phase in Simonin’s (1997) distinction refers to monitoring and managing the

ongoing relationship. Simonin discusses staffing, trust building, resolving conflicts,


32

transferring resources, training, and renegotiating agreements as key skills for this phase.

It is interesting to note that Simonin argues that this phase affects the learning and

ultimately success of the relationship. Drawing on Lorange and Roos (1990) as well as

Parkhe (1991), Simonin argues that the ability is important to devise solutions that fit the

often-differing requirements of specific alliances.

Several other authors have identified important abilities in managing ongoing alliance

relationships. Doz (1996) argues that firms need to learn to manage the dynamic

evolution of the alliances. This requires managing transitions in a cycle of learning

reevaluation and readjustment. Madhok and Tallman (1998) argue that firms need to

carefully manage the balance between economizing on the cost of managing the

relationship and the potential destroying the value potential of the relationship by under-

investing. The understanding the dynamics of the payoffs (Khanna, 1998; Khanna et al.,

1998) and striking the balance between cooperative and competitive behavior would

seem an important ability in this context. A lack of understanding the process dynamics

frequently acts to undermine the potential gains from the alliance (Madhok, 1995;

Parkhe, 1991).

The fourth phase Simonin (1997) discusses is the termination phase. Many strategic

alliances are designed for limited periods. Especially non-equity strategic alliances that

are the focus of this dissertation can be expect to be in almost all cases of limited

duration. Simonin points out that both the timing and the form of exit can be important to

be able to realize the gains from the alliance. However, this phase of alliances has

received considerably less attention in the literature than, for instance the formation

stage.

Based on the elements of know-how described above, Simonin (1997) tests a structural

equation model that analyzes the effects of alliance experience and alliance know-how

on the perceived performance of alliances. His results suggest that alliance know-how

significantly relates to better alliance performance. While an important first step,

Simonin’s results still leave several questions open. Simonin’s results suggest that

alliance know-how is related to alliance experience. However, whether firms exhibit

differences in their learning from experience remains open. This question is addressed by

a recent study of Kale and Singh (1998). In a cross-sectional study, the authors the

relationship between knowledge articulation, codification, sharing and internalization

and the firm’s capability to manage alliances.

Lorenzoni and Liparini (Lorenzoni & Lipparini, 1999)show based on several case studies

that firms can develop advantage by orchestrating multiple sources of learning. Alliance


33

capability encompass not only the ability to manage the single alliance but require as

well the coordination between alliances. One an organization is involved in a large

number of alliances interdependence and potential conflict between relationships arises.

For instance relationships with competitors need to be separated credibly. Also the

coordination between relationships is becoming increasingly important to steer a set of

partners into a common direction and to occupy the lead position in network of alliances

(Lorenzoni & Baden-Fuller, 1995).

CONCLUSION

In recent years, a large number of studies have analyzed alliances as an mode to conduct

economic activity. This increasing body of literature has greatly advanced our

understanding of alliances. Nonetheless a coherent body of theory is still largely lacking.

A multitude of perspectives and little coherence of the even the subject of analysis still

characterize this field of study.

This paper has tried to synthesize the literature on alliances. Due to the explosive growth

in the literature, this review cannot claim to be all encompassing. Rather, main

contributions have been selected and reviewed. This paper has extended the current

literature on alliance capabilities. While an increasing number of studies has used the

notion of alliance capabilities, few authors have developed this notion in greater detail.

This paper has developed this notion further to facilitate its use in empirical studies and

management practice. Alliance capabilities are increasingly important in firms that

manage a large number of alliances simultaneously. These firms are increasingly forced

to institutionalize alliance management practices. Due to the strategic importance of

alliances in many of these firms, alliance capabilities carry the potential to be a source of

competitive advantage.

Future research should investigate the building blocks and elements of alliance

management capabilities. Rigorous cross-sectional research, as well as further rigorous

longitudinal in depth investigations are needed to further our understanding how alliance

capabilities can contribute to firm performance. Especially how firms build these

capabilities would warrant further attention.

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