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Despite the seductive strategic appeal of alliances, firms that seek to use them face substantial challenges. Not only do firms frequently report difficulties in managing alliances,7 4 alliances yield disappointing returns75 and high failure rates that are reported to be up to 70 percent in some sectors.76 For example, unexpected delays and other problems arising from Boeing's underperforming alliance to build and commercialize its 787 Dreamliner have inflicted significant damage in the marketplace (including considerably strengthening the competitive position of its rival, Airbus), along with billions of dollars in unanticipated losses.77 Some of the more important challenges to alliance success include alliance complexity, organizational control/oversight issues, and critical alliance knowledge gaps.

Alliance Complexity

Alliances involve a highly complicated form of organization as they have both intrafirm and interfirm alliance management considerations and processes. They often also operate as standalone businesses, structures that pose yet more management issues and complexities. Many alliances fail due to firms' insufficient knowledge about how to effectively employ, structure, and manage the alliance. Specific areas where a lack of expertise has contributed to alliance misuse and mismanagement include the identification and selection of qualified potential partners, partner goal alignment and negotiation, the development of appropriate structures and processes, alliance management (including partner firm conflict management), and exit strategy. Even if firms are sufficiently knowledgeable about the art and science of alliances, two other related issues pose significant challenges; partner firms that lack sufficient alliance experience and knowledge of alliance processes will often cause an alliance to fail despite the expertise and best efforts of more knowledgeable partners, and the complicated organizational nature of alliances often contributes to alliance failure despite all partners possessing strong alliance-making and alliance-management skills.

Organizational Control/Oversight Issues

An often noted challenge to alliance success is the relative lack of formal control and administrative oversight of alliance activity in comparison with the oversight of activity resulting from vertical integration. In the latter case, all activities, processes, and oversight occur within the firm itself. Indeed, many consider the issue of control and oversight to be the most fundamental explanation behind alliance under performance and failure, and a significant advantage of vertical integration.78 The difficulties Boeing experienced with alliances in building the Boeing 787 Dreamliner illustrate the inherent shortcomings of alliances relative to vertical integration with regard to control. The project has suffered many substantial delays that have cost Boeing billions of dollars in unanticipated losses. The main cause of these delays has been insufficient oversight and control of suppliers, which has been attributed in large part to Boeing's decision to engage in an outsourcing alliance instead of keeping processes in-house, thereby weakening their control of key processes.79 Representative examples of this include:80

Wachovia Capital Markets senior analyst Joe San Pietro cited "contacts deep within Boeing's supply chain" in contending that problems with overseas suppliers are endangering Boeing's aggressive schedule to deliver the 787. He downgraded the stock.

San Pietro's report said the first center wing box—the key structural element of the center fuselage that holds the wings—delivered last week from Fuji in Japan to Global Aeronautica in Charleston, S.C., was sent without the wiring, hydraulics and many of the fasteners that were to be pre-installed.

"This is now requiring a scope rework between Boeing and Global Aeronautica, as GA would be forced to become responsible for supplying the innards," San Pietro reported.

San Pietro said Boeing's other 787 partners also have fallen behind schedule, especially Mitsubishi, which is making the wings in Japan; and Alenia, making the rear fuselage in Italy.

"Alenia . . . appears to be the major culprit at this time, and we understand that Boeing has sent an army of engineers to help get the program back on track," he wrote.

San Pietro said he was told "the suppliers are unhappy with the costs of maintaining schedule" and are demanding more money from Boeing.

He said that, having outsourced the fabrication of most of the 787's airframe, "Boeing has no internal capability to manufacture the major components" so it lacks leverage to oppose such demands.

While a lack of control is a potential shortcoming of alliances, in some business contexts it can be an advantage of alliances (relative to vertical integration) as a form of business organization. Specifically, evidence from both research and practice indicate that there are business activities where less control and formalization (explicit rules/procedures to govern business activities) may benefit business outcomes. For example, in the context of radical new product innovation, the bureaucratic controls that often accompany vertical integration may inhibit the freedom of action and spontaneity needed for successful innovation.81 Research suggests that high-velocity and high-uncertainty environments call for simple routines and a reliance on people over process.8 2 This is why radical innovation has typically occurred in the domain of entrepreneurial start-up ventures. These ventures reject bureaucratic systems, processes, and the infrastructure of large established firms in favor of flexible, discovery-based approaches to developing groundbreaking technologies and products. Indeed, the success of small, entrepreneurial start-up firms with regard to innovation provides some of the motivation behind the popularity and growth of alliances formed to engage in radical new product innovation. Such alliances not only offer the opportunity to partner with firms that are not constrained by bureaucracy, but the inherent limits of cross-firm/alliance governance (relative to vertical integration) constrains the ability of bureaucratic control to be applied to the interorganizational innovation team as, naturally and desirably, "each partner's influence over the other firm's behavior is marked by partial impotence."83

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