Strategic Alliances: Promise, Perils, and a Roadmap to Success
C. Jay Lambe and Aaron Hayden
Strategic alliances are collaborative business efforts between two or more firms in which the firms combine their resources to achieve mutually compatible goals that could not be easily achieved by any firm alone.1 They represent an interfirm alternative for companies that wish to pursue strategic business opportunities that would be difficult (if not impossible) to successfully undertake on their own.2 Strategic alliances are of considerable interest to both executives and researchers for two important reasons. First, because firms increasingly employ them to facilitate strategic outcomes, alliances have a vital impact on the business performance of the majority of firms.3 For example, in the mid-2000s, 30 percent of the revenues of large firms were produced through strategic alliances, with such revenue having an annual growth rate of 25 percent and an estimated total value of $40 trillion.4 Second, despite the substantial strategic impact of alliances on firm performance, many gaps still exist regarding the factors that drive alliance performance, as a result of the considerable organizational complexity of strategic alliances.5
OVERVIEW: ALLIANCE CONCEPTS AND TERMINOLOGY
The chapter begins with an overview of alliance concepts and terminology that will act as the foundation on which the rest of the chapter will build. Within the study of strategic alliances, one can find a mix of views regarding terminology and the definition of concepts. This chapter presents definitions that are generally well accepted within the field. The topics discussed apply not only to business firms but also to a wide variety of organizations including nonprofit organizations.
Strategic alliances, as noted earlier, are joint efforts between two or more firms in which the firms combine their resources to achieve mutually compatible goals that the companies would find difficult to achieve alone. A key distinguishing characteristic of alliances is the degree to which there is a need for a collaborative working relationship between firms. Hence, when interfirm endeavors require close collaborative relationships as opposed to those that are at arm's length or guarded in nature, a wide variety of different types of (formal and informal) business relationships may be classified as alliances. Examples include joint ventures, outsourcing partnerships, strategic purchasing arrangements, a variety of research and development consortia, and complex technology licensing agreements.
Resources (in both firm and alliance contexts) are commonly defined as intangible or tangible entities (e.g., a capability or physical asset) available to a firm to employ in marketplace competition.6 Examples of intangible resources include assets such as brand equity, organizational culture, and knowledge possessed by employees. Examples of tangible resources include assets such as capital, IT hardware/software, buildings, and other physical facilities.
Alliance business outcomes (i.e., outcomes that determine alliance performance) are often measured by an index of metrics that capture the multidimensional aspects of one or both of the following broad types of outcomes:7
Profit Performance—the degree to which the alliance business efforts generate a sufficiently high and growing level of profits for the partner firms.
Alliance Competitive Advantages—the degree to which the strategic alliance has achieved or developed advantages in its arena that cannot be matched by competitors.
Alliance relationship refers to the working relationship between alliance partners and plays a critical role in alliance performance. In general, relationships that facilitate superior alliance performance and outcomes are characterized by the existence of high levels of a number of key variables. Three of these variables are trust, commitment, and cooperative norms.
Trust can be thought of as a willingness to rely on an alliance partner.8 This is a critical aspect of the alliance relationship as there are many important aspects of a partner's behavior that a firm cannot observe. Without a sufficient level of trust, firms are less likely to feel that they can rely on a partner, which in turn reduces the degree of close collaboration among the partner firms.
Commitment is an alliance partner's belief that an alliance is important enough to justify maximum (or even substantial) efforts to maintain the alliance. In other words, a committed party believes the alliance is worth working on and investing in to ensure that it is successful and endures.9
Cooperative or relational norms form a social governance mechanism or social contract based on the partners' belief that a joint expectation guides each partner to behave in a manner that is mutually beneficial and supportive.10 The degree to which cooperative norms emerge and exist is strongly influenced by the degree to which sufficient levels of alliance partner trust and commitment exist.
Alliance relationship phase refers to the evolution of functional alliance relationships (and their characteristics of trust, commitment, and cooperative norms) over time.11 Phases are descriptive of the alliance's current value-creation performance and potential, and the strength and certainty of the relationship between alliance partners. Phases occur in one manner or another in all alliances, regardless of whether the alliance is a formal or informal arrangement. It has been found that alliance partner interactions develop the relationship over time as positive social and business outcomes take hold. These create deep, noncontractual mutual dependence between the partners that bind them to the alliance, and lead to further increases in commitment to the alliance. Through interactions over time, partners develop relationship norms that guide them to think of each other as part of the same team, and to work toward common goals and mutual benefits.
Through partner interactions over time, the alliance relationship passes through initial relationship development milestones (or, phases) of exploration and expansion, before entering the commitment phase during which relational exchange attributes are acute and highly developed. Relationships develop to reach the maturity phase during which commitment to the exchange partnership is at its highest. Mature relationships eventually pass through phases of decline and deterioration. It is important to note that the process of decline can be reversed. Alliances can reenter earlier phases as alliance partners find new, attractive opportunities to employ their complementary resources, and/or find ways to address issues that may have damaged the relationship. A summary of the five phases of the alliance relationship is as follows:12
Exploration: Partner firms discover and test goal compatibility, integrity (trustworthiness), and mutual performance, as well as potential obligations, benefits, and burdens involved with working together on a long-term basis. Generally, small, initial joint efforts/projects take place that enable partners, in a "learning by doing" process, to evaluate each other. It is not usual in this phase for alliances to create value for their firms, value creation being limited due to the process of discovery and trial and testing.
Expansion (buildup): Partner firms receive increasing benefits from the relationship, and a sufficient level of trust and satisfaction has been developed that they are more willing to become committed to the relationship (and its expansion) on a long-term basis. Value creation is much more significant than in the exploration phase.
Maturity: Partner firms are now in an ongoing, long-term relationship in which they each receive high levels of satisfaction and benefit from the relationship, and are firmly committed to its continuance. Value creation is at or near its highest levels during this phase.
Decline: One or more of the alliance partners has begun to experience significant dissatisfaction, are contemplating relationship termination, considering alternative partners or business arrangements, and/or beginning to communicate intent to end the relationship.
Deterioration: Partners have begun to negotiate terms (formal or informal depending on the formality of the alliance) for ending the relationship, or are in the process of dissolving the relationship.
Benchmarks are employed by many firms to determine relationship phase and the ongoing fit and health of their alliances.13 For example, in the pharmaceutical industry, Eli Lilly's Office of Alliance Management uses data, gathered from both their own and their partners' organizations, to create an index of alliance characteristics that gives them a sense of alliance phase.14 The specifics of the metrics Eli Lilly employs are, understandably, proprietary, but it is known that they assess alliance development and value-creation health on both hard metrics of relationships such as alliance performance and goal alignment, and soft metrics such as trust, fairness, and leadership.
Interimistic alliances are an important and prevalent type of alliances that are interim in nature. Interimistic alliances are close, collaborative, fast developing, and (often) very short lived, in which partner firms pool their resources to address a fleeting, but critical, business opportunity or threat.15 They exist in many industries, but are especially prevalent in high technology (including biotechnology) and/or outsourcing due to short product and exchange relationship lifecycles.16 The pace of technological change often requires a rapid alliance (rather than go it alone) R&D/new product development response to immediate threats posed to firms' existing product lines, and/or short-lived opportunities for competitive edge and associated revenue growth. A sense of the rapid response required and the fleetingness of the mission is provided by a senior director at Microsoft who said, "I used to tell people that Internet years were like dog years. These days I feel as if Internet months are like dog years. The rate of change is stunning."17
Interimistic alliances are often formed at short notice (and frequently with partners with whom the firm has little or no experience), must produce immediate results, and are expected to end quickly (whether successful or not) since they often have a very specific mission. In the technology arena, there have been numerous rapidly formed, time-pressured, collaborative, and short-lived R&D or new product development alliances going back as to the 1980s.18 For example, the rapid transformation of the payments industry that resulted from the unleashing of the Internet prompted both technology firms (e.g., Microsoft and IBM, and start-up firms such as CyberCash, now part of PayPal), and payments firms (e.g., MasterCard and Visa), to form "portfolios" of quickly developed, collaborative payments-technology alliances that were expected (successful or not) to be short lived, as they were intended to guide rapidly evolving technology standards/practices in the industry.19
Networks are often characterized in an alliance context as business relationships (which can also involve other alliances) that alliance partners have with firms or organizations outside the alliance. Given the scope of this chapter, the only aspect of networks to be covered in detail is network effects.
Network effects are the relationship and performance impacts an alliance has on each partner firm's respective network. Network effects are an important consideration because (1) an alliance can significantly impact the business performance of other business relationships partners have with firms outside the alliance, and (2) each partner's business relationships with firms outside the alliance can significantly impact their relationships with each other as well as the business performance of the alliance. Measures of a network's effects are sometimes employed by firms to gauge the degree to which an alliance has a positive or negative impact on the business performance of its own network of business relationships. For example, Eli Lilly's Office of Alliance Management tracks and assesses not only the performance of an alliance with respect to its primary operations, but also the impact the alliance has on other alliances within the Eli Lilly network.20
I f the measurement of network effects leads a partner to conclude that the alliance has a positive overall impact on its network business performance, the partner's commitment to the alliance will be strengthened, as such an outcome (even if it is considered to be indirect) provides another indication that the alliance is creating value for partner firms. Conversely, if the partner's assessment is that the alliance has a negative impact on the performance of its network, this will understandably dampen their commitment to the alliance. The magnitude and direction (positive/negative) of an alliance's network effects on the partner's network performance are influenced by a number of factors. These generally fall into one of three categories:21
Resource transferability: The extent to which the alliance's resources can also be employed by other business relationships in the partner's network.
Activity complementarity: The degree to which the efforts of the alliance complement the efforts of other business relationships in the partner's network.
Collaborative attractiveness: The extent to which the alliance sends positive or negative signals to firms in the network about the partner's "business relationship attractiveness." This can be characterized in terms of (1) the partner's ability and inclination/tendency to have cooperative and mutually beneficial business relationships with other firms, and (2) the attractiveness that results from the potential for other firms in the alliance to also form rewarding business relationships with firms in its network.