Strategies of Cooperation Managing Alliances Networks and Joint Ventures

Strategies of Cooperation Managing Alliances Networks and Joint Ventures

Strategic alliances are increasingly common, as many organizations look towards various partnering arrangements. This second edition of Strategies of Cooperation extends the first edition’s clear and comprehensive survey of strategic alliances. Presenting different disciplinary perspectives (economics, strategy, organization theory) and numerous examples from the corporate world. The text has been thoroughly revised and updated, taking account of new theoretical models, and its coverage of case studies has been extended. It will be ideal for business students and managers alike wishing to understand the challenges of managing alliances.

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Strategies Of Cooperation: Managing Alliances, Networks, And Joint Ventures 2nd Edition by John Child, David Faulkner (Oxford University Press) excerpt: Strategic alliances and other forms of interfirm cooperation have grown remarkably since the mid-1980s. They are one of the more important new organizational forms. Despite the managerial and organizational challenges they undoubtedly present, there is no sign that alliances are a transient phenomenon. A survey based on 323 questionnaire responses and over 400 interviews with senior executives in 2000 indicated that alliances were `expected to account for 16 percent to 25 percent of median company value within five years and, astonishingly, more than 40 percent of market value for one-quarter of companies’ (Contractor and Lorange 2002: 4).

Alliances are, along with outsourcing and virtual value-chains, one of the defining forms of modern networking among firms. As noted, they represent a clear break away from the internalized, hierarchical model of the firm, of which General Electric and IBM were salient examples in the 1980s. Today, leading corporations such as these have as many as 1,000 alliances. In the past, such corporations might have regarded alliances as a relatively peripheral activity, primarily for entering emerging country markets in which risks were high or government regulations required jVs or licensing agreements. Today, alliances are regarded as a means to achieving fundamental strategic objectives such as a strong market position, significant knowledge acquisition, and major cost reductions.

This book attempts to take stock of current thinking on the subject of cooperative strategy. The focus will he on cooperation between firms, though many of the insights into establishing and managing interfirm cooperation can also be applied to partnerships between other types of organization. Alliances, which are partnerships between firms, are the normal agent for cooperative strategy. “they are often `strategic’ in the sense that they have been formed as a direct response to major strategic challenges or opportunities

which the partner firms face. Alliances are a means to an end, and consequently they are not necessarily formed with a long-term cooperative relationship in mind. But they may be established with this intention, the more so when the partners invest substantially in them. Once alliances are up and running, partners may also perceive unanticipated benefits from cooperation, such as mutual learning, which lead them to reevaluate it positively.

However, alliances can also be formed with shorter-term objectives in view. A firm may intend to use an alliance as a means of appropriating competencies and knowledge from its partner, which it continues to regard as an actual or potential competitor. Or it may enter into an alliance as a way of taking out an option for the future in conditions of uncertainty-for example, entering an unfamiliar national market. Once it has mastered the uncertainty, it may no longer attach much value to continuing the cooperation.

Whatever the underlying motivation for its formation, any alliance requires an ability to manage cooperation in order to generate returns to the partners. The ever-growing prevalence of alliances, and the need to understand the basis for their successful management, provides the main justification for the present book. It is informed by John Child’s work on JVs in China and to a lesser extent Brazil and Eastern Europe, David Faulkner’s work on strategic alliances between companies in developed nations, and Stephen Tallman’s work on understanding the processes and motivations for alliance strategies. It also attempts to integrate what the authors believe to be the salient ideas of other writers on cooperative strategy in tackling some of the key issues currently under debate in the field. A number of important ideas emerge from the writers’ efforts in this endeavor, which are perhaps worth capturing before the reader embarks on the task of a detailed reading of the book:

Cooperative strategy is not new; it has always been with us. It means what it suggests, namely the achievement of an agreement and a plan to work together; not the giving of orders down hierarchies. Firms embarking upon alliances with other firms need to keep this in the forefront of their consciousness when devising systems and controls, and activating them in the joint enterprise. This book, whilst concentrating on perhaps the pre-eminent form of cooperation-namely, the various forms of strategic alliance-encompasses other forms of cooperation as well that are met in business activity, even down to the humble distributor or supplier agreement.

Commitment and trust are the key attitudes most strongly associated with success in alliances. No amount of energy and clear direction will compensate for their absence. And it should be noted that commitment can exist without trust and vice versa, but both are necessary for a lasting and stable relationship.

Strategic alliances, including JVs, collaborations, and consortia, are at base all about organizational learning, and should be structured towards that end. However, many other types of cooperation, such as networks or virtual corporations, are primarily about skill substitution-that is, Company A cooperates with Company B because it sees that its partner can exercise a particular skill better than it can.

Other forms of cooperative strategy, such as virtual organizations, networks, and outsourced corporations, are about capability substitution. Their strength lies in

their specialization, adaptability, and flexibility, but not necessarily in the learning opportunities they afford.

Cooperative enterprises do not do away with the need for intelligent purpose, a brain, and a central nervous (information) system if they are to achieve competitive advantage in relation to integrated corporations that more self-evidently have these characteristics.

To cooperate does not mean to allow all proprietary information to pass unchecked to the partner. As Richardson (1972) warns: ‘Firms form partners for the dance but, when the music stops, they can change them.’

Issues of control need to be addressed, but more subtly than in hierarchies, as too great a degree of control in cooperative enterprises stifles innovation and motivation, and can lead to the breakdown of the cooperation.

A successful alliance is one that evolves into something more than was perhaps foreseen at the outset. Conscious attempts must be made to cause the alliance to develop if it is to attract the best people, and contribute most to the partner companies.

The interface between the two (and sometimes more) company cultures is the crucible of potential achievement. Sensitivity to each other’s cultures is vital to effective joint operation. Its absence leads to a failed alliance, however great the potential economic synergies between the partners.

Information technology (IT) makes the task of coordinating cooperative strategy that much easier, but it cannot and must not be allowed to substitute for bonding between cooperating company executives.

These and other key lessons from the research behind this hook are developed in more detail in the chapters that follow.

Part I is concerned with the nature of cooperation and its role in strategy. Chapter 2 outlines the main perspectives from economics that contribute to an understanding of cooperative strategy. The theory of cooperative strategy is related to market-power theory, transaction-cost economics, agency theory, resource-based theory, transaction value theory, real options theory, and increasing-returns theory. Chapter 3 continues to address major theoretical models of cooperation, but from managerial and organizational perspectives, such as game theory, strategic-management theory, resource dependence, social network theory, and organizational theory. It summarizes the relevance of these theories and draws out the complementarities between them.

Cooperation depends on trust between partners. Chapter 4 presents the insights into trust that can be derived from psychological and sociological research. This identifies the factors on which trust can he based and through which it can develop. The first step is to find a basis on which the risks of depending on partners become mutually acceptable.

As the partners get to know more about each other, this improved understanding should breed further mutual confidence. Eventually, the cooperation may become firmly established on the basis of genuine personal friendships between the key participants. These elements in trust development can support the phases through which cooperation within an alliance can develop. The chapter closes with guidelines for developing trust within cooperative relationships between firms.

Part II is concerned with how cooperation between firms is established and the various forms it can take. Chapter 5 introduces the idea of an alliance process by which two firms find each other for a cooperative venture and discusses the principal motives behind a cooperative strategy. It considers the most common reasons for setting up a collaborative activity with a competitive or complementary firm. The various types of resource and skill deficiency are rated in relation to their importance as stimuli to cooperative activity. It is emphasized that it is not only competence vulnerabilities, but also the desire to spread risk and the need to reach markets fast, whilst ‘windows of opportunity’ last, that drive organizations to set up cooperative arrangements. Strategic, transaction-costreducing, and organizational learning motives for cooperative activity are compared and contrasted (Kogut 1988).

Chapter 6 considers the criteria to be highlighted in selecting a partner and deciding upon the appropriate form the alliance should take. Once a collaborative activity has been decided upon, it is necessary to find an appropriate partner. This chapter attempts to operationalize the strategic-fit/cultural-fit matrix. It emphasizes that the possible achievement of synergies through the use of complementary assets and competencies underlies the concept of strategic fit (Geringer 1991). It also draws the reader’s attention to the need for intercultural sensitivity if the alliance is to succeed. The second half of the chapter considers the question of collaborative forms, and which one to select. The key characteristics of the various forms of cooperative activity are considered, as well as the circumstances in which each form is most appropriately adopted. In addition to the major strategic alliance forms of the joint venture, the collaboration and the consortium, the flexible nature of collaborative networks is discussed.

Chapter 7 addresses the question of how to negotiate in an alliance situation, and how to value your partner’s and your own prospective contributions to the enterprise. It emphasizes that, whereas in a takeover situation, the negotiators are single-mindedly concerned to achieve the best price for their company-the highest or lowest price depending on the side of the negotiating table-this is not the case in an alliance. Unless both partners are concerned that the other has a good deal, the alliance will not prosper over time. A so-called win-win situation is sought. The problem of contribution valuation, however, is truly more an art than a science.

Chapter 8 looks at the strengths and limitations of network forms in greater detail. It considers the varied types of network that form the basis of much cooperative strategy. Networks are the loosest form of alliance between companies. At their weakest they represent a well-developed communication system within an industry that enables companies operating in that industry to keep abreast of developments. They are often crystallized in trade associations. In d stronger form they represent a ready-made band of would-be cooperating companies willing to tackle commercial

opportunities together without setting up formal links that may compromise the individuality of networking firms. Dominant-partner and equal-partner networks are compared and contrasted.

Chapter 9 addresses the concept of the IT-based virtual corporation in the information economy. The `Virtual Corporation’ is the name for the network and F1′-orientated form of organization based around centers of excellence in particular competencies. It can be created very rapidly to meet specific, sometimes transitory, sets of circumstances. It can equally easily be dismantled and re-formed as circumstances and profit opportunities change. This new concept is discussed and its strengths and limitations assessed. Many strategic alliances demonstrate characteristics of the virtual corporation.

In Part III different aspects of the management of cooperative activity are reviewed. Chapter 10 discusses the general and overall management of alliances. It emphasizes that the management of alliances differs in its essential nature from that of unitary companies. The ability to give instructions is replaced by the need to seek areas of mutual agreement and to develop constituencies behind a course of action (Kanter 1989). It is noted that appropriate management styles will differ, particularly in the circumstances of a JV, which can be treated much like an ordinary company, and a collaboration, where a sensitive boundary-spanning mechanism is necessary.

Chapter 11 looks at control as an issue in cooperation. It recognizes that control is not possible in a complete sense in alliances because of the consensual nature of alliance activities, but also that some control by each partner is necessary if the partners are not going to feel themselves to he in the hands of total uncertainty. The importance therefore is to specify controls that are at once clear yet flexible.

Chapter 12 addresses the issue of alliance corporate governance, which has been relatively neglected in the literature on alliances. The question of corporate governance arises particularly with equity JVs in which parent companies as owners appoint managers to run the ventures as their agents. This chapter suggests key elements in an analysis of JV governance, focusing on partner preferences. It adopts a broad definition of corporate governance as the process of control over and within the firm (i.e. the JV) that aims to reduce risks to its owners and to ensure that its activities bring a stream of acceptable returns to those owners in the long term.

Chapter 13 deals with organizational learning. It discusses the role of organizational learning in all its aspects as a primary driver in cooperative activity. It distinguishes different forms of learning in alliances, including learning about, from, and with an alliance partner. Learning is divided into technical, systemic, and strategic components and the implications of these distinctions for alliances are identified. Particular attention is given to the mechanisms and policies that help promote and transmit learning within alliances.

Chapter 14 addresses the specific area of human resources. It considers some of the key human resource issues that arise when personnel from different countries and different cultures are brought to work together in a new collaborative environment. The building of local management teams, the nature of training, and the role of the international manager are discussed, as is the role of human resource management (FIRM) as a tool of control within alliances.

Chapter 15 is concerned with culture. It is now widely recognized that one of the most common reasons for the failure of alliances is the clash of the partners’ contrasting company cultures. These can be reinforced by differences between national cultures in an international alliance. Yet there is evidence to suggest that the issue of cultural congruence is not high on the checklist of companies seeking partners. The chapter discusses the nature of cultural differences and how they can present barriers to performance and to bonding. It also considers measures to overcome such problems. The chapter deals in particular with two distinct forms of potential cultural problem-that between two partners from the developed world, and that between a developed world company and a partner from the developing world such as China, Central and Eastern Europe, and Latin America. In discussing these collaborative configurations, the ‘culture problem’ will be assessed in its broader institutional context.

Chapter 16 looks more specifically at how to manage cooperative strategy in relation to emerging economies. Cooperation between companies in developed and emerging economies is a particularly fast-expanding feature of global business relationships. The chap-ter discusses this issue with particular reference to Brazil, China, and India, and seeks to identify ways in which such collaborations differ from those between firms that are both in developed countries.

Part IV addresses the question of how cooperative activity can achieve positive performance, however defined, and he helped to evolve through time. Chapter 17 examines the issue of alliance performance. Unlike unitary forms of business organization, alliances, whether formal or informal, often face differing objectives and so find success and failure difficult to assess. Objectives may be less economic in scope than for other organizations, payoffs may be indirect through influences on other organizations, and economic performance is seldom reported directly. These considerations make both academic study and practical oversight difficult and challenging.

Chapter 18 emphasizes the importance of the role of evolution in the success of alliances. This implies the growth of the alliance in terms of new projects and new responsibilities. It is maintained that all alliances suffer potentially from entropy (Thorelli 1986), and that, unless the bonds brought about by the creation of the cooperative activity are constantly attended to and strengthened, there is an ever-present risk that the alliance will decline in importance to the partners, attract mediocre staff, and steadily become marginalized in the partners’ priorities.

Chapter 19 presents some closing reflections on the ways in which progress needs to he made in bringing cooperative strategy further into the mainstream of management thinking. It gives reasons why cooperation between organizations is increasingly appropriate for operating in a complex global competitive economy.

As a whole, the hook provides a broad view of the practical and theoretical literature concerning cooperative strategies and the alliance and network organizational forms that are the outcome of these strategies. While based on the research of the authors and representing their views of cooperation, it summarizes and evaluates the work of many other authors as well. It is tied to the academic literature, but is also grounded in cases developed by the authors and others and addresses practical issues of alliance management as well as alliance studies. It can he and has been, used as a textbook in MBA and executive programs.