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Home arrow Management arrow Strategic Management in the 21st Century. Corporate Strategy

MAKING ALLIANCES WORK: GOVERNANCE OF ALLIANCES

There are a significant number of mechanics to consider in building successful alliances. The focus here will be on how to make an alliance work (i.e., achieve or exceed the partner firms' goals) assuming an alliance possesses, prior to its formation, the necessary resource potential for success. One crucial factor is having a set of mechanisms that ensures partners fulfill their obligations to each other, and work cooperatively toward mutually beneficial outcomes. These can be thought of as governance mechanisms. Governance mechanisms reduce uncertainty between partners and inhibit self-interest seeking by one partner at the expense of another.32 Three key governance mechanisms are contracts, noncontractual mutual dependence, and a partner relationship based on cooperative norms. It has been suggested that reliance on only one of these forms of governance does not sufficiently ensure a successful alliance as each has inherent weaknesses. It is thus ideal for an alliance to utilize multiple governance mechanisms.

Contracts (and contractual dependence) are based on a formal, legal document that defines the roles, responsibilities, and obligations of each partner. A contract provides a legal safeguard against a lack of cooperation and actions motivated by self-interest.33 Partners that do not fulfill contractual obligations may pay a heavy price through the legal system. A contract thus creates a form of obligation dependence that often motivates cooperation and concern for mutually beneficial outcomes. However, contracts have inherent weaknesses that make them an insufficient form of alliance governance when used on their own.34 First, it is impossible to write a complete contract, and the more complex the business situation, the less complete a contract will be.35 Second, the exercise of contractual power often (if not usually) results in negative consequences as it tends to create ill-will between partners. This often leads to retaliatory actions that damage the partners' working relationship and the performance of the alliance. At the very least, the exercise of contractual power is not conducive to building a relationship between partners that is characterized by trust, commitment, and a belief that cooperative norms exist. Indeed, it has been noted that "once the contract is referred to, the relationship is dead."36

The preceding quote urging caution about the exercise of contracts has been attributed to James R. Houghton, former chairman of Corning and considered to be an early alliance visionary at Corning. The point was not that having contracts per se is detrimental to effective alliance governance (indeed, contracts represent a safety net if all else fails). Rather, it was that one should apply caution since contracts can signal a lack of a cooperative spirit and trust that can irreparably damage perceptions that relational norms exist. This will make effective alliance governance more difficult as the strength of the relationship between alliance partners is arguably the most critical alliance governance mechanism. On this point there is strong consensus. For example, Kenichi Ohmae, an expert on alliances at McKinsey Consulting, points out that "Good partnerships, like good marriages, don't work on the basis of ownership or control. It takes effort and commitment and enthusiasm from both sides if either is to realize the hoped-for benefits. You cannot own a successful partner any more than you can own a husband or a wife."37 Ben Gomes-Casseres, a scholar on alliances, further notes that there is value to being flexible with partners and taking a dynamic approach to managing alliances:38

Just as the broader strategy is more important than the individual deal, so too the evolution of the relationship over time is more important than the initial deal. Automobile companies today are discovering this fact as allies try to use alliances to rationalise their global operations. Renault and Nissan, DaimlerChrysler and Mitsubishi, Ford and Mazda—each pair is trying to integrate its supply chains, share technology, and produce expensive components jointly. Doing so requires much more than signing a deal for part-ownership or for a joint venture. It requires close planning, continual adjustments, and deep relationships among partner organisations and managers. The reason why this kind of post-deal management is so important is that alliances by their very nature are open-ended and ever changing. If all the terms between two companies can be specified and agreed at the outset, there is no need for an alliance; a contract will do. A true alliance is an organizational structure that enables control over future decisions to be shared and that governs continual negotiations—it is recognition that the initial agreement is incomplete. That is why success in alliances depends so much on governance structures and on the relationship between companies, including personal relationships between managers.

When structuring cross-border alliances and considering the use of contracts, it is particularly important to take cultural factors into ac-count.39 For example, executives at firms in Western countries have often had the notion that companies in some Asian countries tend to expropriate intellectual property. This fear leads Western firms to attempt to employ elaborate legal safeguards, which, if care is not taken, can unwittingly create a climate of distrust. This can be particularly damaging given the importance individuals in some Asian cultures place on relationships as a governance mechanism. For example, the entrepreneurial tradition in China is built around close family ties, and is based in large part on a lack of faith in legal systems. The importance of the relationship as a governance mechanism can also heighten cultural differences in attitudes toward ownership, intellectual property, and the enforcement of laws. In some countries, firms should not expect that contracts will be strongly and enthusiastically enforced, if enforced at all.

Noncontractual mutual dependence is a reasonably symmetric dependence that partners have on each other based on the potential costs that would be incurred if the alliance ended prematurely or failed.40 There are two types of such cost, nonrecoverable real costs and opportunity costs.

Real costs: These are transaction-specific investments that partners make in an alliance that represent a potential, nonrecoverable, real cost should the alliance end prematurely or fail, as they are specific to the alliance (i.e., nonfungible) and would be lost if the alliance were to end. For example, idiosyncratic resources represent mutual, transaction-specific investments in the alliance; thus they would be lost, or at least significantly nonrecoverable, if the alliance ended prematurely or failed. A partner's investments in relationship-specific assets increase the costs of prematurely terminating the alliance as the firm stands to lose their investment. If investments are both substantial and mutual, they create significant mutual dependence on the continuation and success of an alliance. Such dependence motivates partners to act in a nonopportunistic manner, and to cooperate to ensure a collaborative relationship that will promote the success and continuation of the alliance.41

Opportunity costs: Opportunity costs that could be incurred if an alliance were to end prematurely or fail will be a significant consideration to partners if the alliance were formed based on extensive and reliable due diligence indicating that the firms' complementary resources held significant potential for competitive advantage. Early in the life of an alliance, partner firms often already feel a strong sense of interdependence that motivates cooperation to reduce the risk of missing out on the profit and/or strategic benefit potential of the alliance. As the alliance develops over time and its value-creation capabilities increase and become more certain, the mutual dependence of the partners will also increase. The partners will increasingly recognize the opportunity costs should the alliance end prematurely or fail. They will thus be increasingly motivated to build and maintain a collaborative relationship that will further facilitate alliance success.42

Whether based on real or opportunity costs or both, noncontractual mutual dependence motivates partners to work in ways that are beneficial to the alliance even when they might be tempted to do otherwise. Research has also shown that alliances with a significant degree of asymmetric dependence among partners results in power imbalances that often lead to unstable and underperforming alliances.43 Consider for example the alliances that General Motors (GM) had with suppliers in the 1990s.44 GM held far more power in these alliances than its suppliers since it accounted for a large percentage of most of its partner suppliers' annual revenues. Since these were partnerships, it was still critical that GM act in a manner that would maintain a climate of collaboration. In the early 1990s, however, GM's purchasing organization, led by Jose Ignacio Lopez de Arriortua, started to take a hard line in price negotiations, using its purchasing power to, in essence, squeeze many partner suppliers. While this initially resulted in significant cost savings for GM, it also had a devastating effect on its suppliers, and, as a result, damaged (in some cases, irreparably) relationships GM had with some of its partners. Understandably, GM's exploitation of the power imbalance led to supplier resentment and ill-will, leading to some partners defecting and many underperforming alliances. This ultimately diminished or eliminated any initial price savings to GM. When asked about some of the costs associated with these damaged relationships, one automotive consultant stated, "I don't know of any major supplier who will take a new design to GM today, because, in the end, GM will give it to the lowest bidder. When you shut down that innovation spigot, you get a product that is less competitive."45

Despite its effectiveness as an alliance governance mechanism, it should be noted that noncontractual mutual dependence is, on its own, an insufficient form of alliance governance. Business opportunities and needs constantly evolve, and as a result, levels of dependence can fluctuate significantly enough to create significant asymmetric dependence.46 Having a contract to define such parameters as responsibilities and revenue sharing can help to balance partner dependence and act as a safety net should shifts occur in the nature of the noncontractual dependence.

A partner relationship based on cooperative norms (or relational norms) has been shown to facilitate a close collaborative relationship and alliance suc-cess.47 Cooperative norms represent a relational or social contract that has developed between partners over time and through their history of interactions with each other. This jointly informs and guides partner behavior within the alliance. These norms are based on the mutual belief that a common understanding and expectation exists, and that governs each partner's behavior to be mutually beneficial and supportive.48 In such relationships, the enlightened (but not naive) partners do not view the alliance as an adversarial "zero sum game" with respect to the split of alliance benefits and profits, but as an opportunity to expand the benefits/profits for all partners by working together in mutually supportive ways. The development of cooperative norms is strongly influenced by the degree to which the firms and their alliance managers possess skills and exhibit behaviors that facilitate interfirm teamwork and coordination that is motivated by a desire to expand positive business outcomes for all parties involved.49

A relationship based on cooperative norms not only creates noncontractual mutual dependence, but it also can address critical governance shortcomings that might arise when contracts or noncontractual mutual dependence alone are used as governance mechanisms. In the case of contracts, cooperative norms can address the inherent shortcomings of incomplete contracts™ A relationship between alliance partners that is based on the cooperative norm that the partners will work together and be flexible may result in mutually acceptable solutions to differences and disagreements that cannot be captured in a contract. Indeed, partners that enjoy such a relationship tend not to consider a binding formal contract to be a governance option even if one exists. A partner's referral to a contract when disagreements arise also represents an exercise of power that often causes ill-will and conflict between partners. This frequently damages a formerly cooperative relationship and leads to diminished alliance performance if not failure of the alliance. Cooperative norms can also be used to address changes in the balance of noncontractual mutual dependence that can occur during the life of the alliance, and be helpful when it is difficult to gauge mutual dependence. Cooperative norms encourage partners to take a long-term stewardship approach to overcoming periodic fluctuations in mutual dependence, and can motivate continued efforts to achieving mutual benefit and addressing potential conflict.

A relationship based on cooperative norms is not in itself a sufficient form of governance since the relationship may not always hold. Alliance managers or other individuals central to the alliance can change. As a result, there may not always be individual relationships where cooperation is considered the norm. Furthermore, issues related to interpersonal dynamics and managerial skills can lead to damaged relationships or to reduced confidence that a climate of cooperative norms exists. In such cases, contracts and noncontractual mutual dependence can act as a safety net to ensure continued cooperation as well as serve as the last line of defense to protect partners' interests in the alliance.51

 
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