The Network Perspective to Strategic Alliances

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The Network Perspective to Strategic Alliances
Stefka Nenkova, Premium Member
Gulati (1998) understands strategic alliances as “voluntary arrangements between firms involving exchange, sharing, or co-development of products, technologies, or services”. The distinction lies within the entering process – becoming part of an alliance constitutes a strategic action (Gulati, 1998).

Gulati (1998) emphasizes the importance of a network view (besides the the traditional dyadic perspective towards strategic alliances (Editor: dyadic: ~interaction between a pair of 2 entities) on the factors that have an impact on the behavior and performance of allied firms. According to him the firm’s existing (social) network not only influences the shaping of new connections but also has an effect on their design, evolutionary path and their success. He considers the sequences of key facets and events in strategic alliances, adding a network perspective towards strategic alliances that could bring new issues worthy of consideration (Gulati, 1998):
  • FORMATION OF ALLIANCES – motivations involve enhancing market power, increasing efficiency regarding transaction costs, as well as knowledge acquisition; a firm’s specific attributes such as size, age, competitive position, product diversity, and financial resources and other resource capabilities are considered important factors that may predict strategic alliance formation; strategic interdependence may also explain a connection between firms but not necessary an alliance.
    From a network perspective the motivations lie in reducing the risks involved in an alliance such as free-riding, opportunism or unpredictable behavior in general by choosing a partner, for which they have information regarding requirements and reliability/reputation or, in other words, by becoming part of a network; it is important to keep in mind that embeddedness of firms in networks can be both restrictive and enabling for the alliances a firm may enter
  • GOVERNANCE STRUCTURE OF ALLIANCES (or the formal contractual structures used to organize the partnership) – transaction-cost economists focus on the appropriation concerns in alliances resulting from contracting hazards and behavioral uncertainty when they were being formed, they suggest that hierarchical governance structure is an appropriate way to reduce their influence.
    There are several shortcomings of that argument found in the network theory: 1) it treats the alliance as singular event that represents only the transaction costs embedded in its formation, 2) it neglects the fact that alliances are not a single-party cost minimization but involves dual exchanges from both parties, 3) it focuses only on apparition concerns omitting concerns stemming from coordination costs, which are often crucial after the formation of an alliance; the answer to those shortcomings that networks provide is the mutual trust that reduces coordination costs and the need for hierarchy in the relationship (includes knowledge-based trust, deterrence-based trust, etc)
  • DYNAMIC EVOLUTION OF ALLIANCES - initial conditions under which alliances are formed such as the objectives of partners, their adeptness at learning, and the nature of the environment and interorganizational context have significant role in the alliance further development.
    The network perspective brings new light on the dynamic processes occurring during the development of an alliance – individual contract between firms through networks may impact the decision-making within those firms, as well as within other partner organizations, however it may also lead to conflicting identities and could create control benefits that may be used as an advantage over other firms in the network resulting in an internal network competition
  • PERFORMANCE OF ALLIANCES – the initial studies of alliance’s performance involves researching the factors that lead to terminating an alliance such as concentration and growth rates, country of origin of partners as developed or developing, the presence of concurrent ties, partner asymmetry, age dependence or the duration of the alliance, the competitive overlap between the partners, and characteristics of the venture itself such as autonomy and flexibility (Beamish, 1985; Harrigan, 1986; Levinthal and Fichman, 1988; Kogut, 1989); however, they show limited understanding on alliance performance as they fail to make a distinction between natural (predestined at the very onset) and untimely “deaths” (resulting from environmental shift).
    Gulati and Lawrence (1997) focused on the role of networks in performance and concluded that, on average, “more embedded tie relationships performed better than alternative sourcing arrangements” and were especially effective in situations involving high levels of uncertainty; Lyles (1988) suggests that cooperative capabilities that firms acquire as a result from multiple past partnership (usually as being part of different networks) may have an effect on the success of those firms with alliances
  • PERFORMANCE CONSEQUENSES FOR FIRMS ENTERING ALLIANCES – several studies have tried to show the benefits for a firm entering an alliance, Baum and Oliver (1991, 1992) and Uzzi (1996) for example suggested that firms with ties to vertical suppliers and key institutions in the environment have higher survival chances, considering survival as a proxy for performance; Helper (1990), as well as Heide and Miner (1992) consider close vertical ties as boosters for information exchange and long-commitment ties, which lead to performance benefits for the firms in such an alliance.
    Gulati, Shortell, and Westphal (1997) though point out that studies like those miss to consider the network perspective especially regarding firm embeddedness – in other words, what influence have past ties as well as the firm place in a network to its performance; moreover, they claim that “not all networks provide equal benefits to their members, and some networks are better than other”; they suggest that further research is needed in order to find the reason why this occurrence takes place.
In his conclusion, Gulati (1998) tries to summarize the insights that a network perspective could add to the theory on strategic alliances:

Research issue Empirical questions Dyadic (1:1) perspective Network perspective
Formation of alliances Which firms enter alliances? Whom do firms choose as alliance partners? Financial and technological imperatives that lead firms to enter alliances Complementarities that lead them to choose specific partners (e.g., Pfeffer and Nowak, 1976a; Mariti and Smiley, 1983) Network factors that may constrain and also create opportunities for firms to discover alliance prospects and choose specific partners (e.g., Kogut et al., 1992; Gulati, 1995b; Gulati and Westphal, 1997)
Governance of alliances Which ex ante factors influence the choice of governance structure? Transaction costs, interdependence, and power asymmetries (e.g., Pisano et al., 1988; Harrigan, 1987 Networks that may mitigate ex ante appropriation concerns and coordination costs that can affect the choice of governance structure (e.g., Zajac and Olsen, 1993; Gulati, 1995a; Gulati and Singh, 1997)
Evolution of alliances and networks Which ex ante factors and evolutionary processes influence the development of individual alliances and networks? Social and behavioral dynamics between partners in alliances (e.g., Ring and Van De Ven, 1994; Doz 1996) Social, behavioral and competitive dynamics that occur across organizational boundaries among groups of firms in alliances (Nohria and Garcia-Pont, 1991; Gomes-Casseres, 1994) The emergence and development of a network (e.g., Gulati and Gargiulo, 1997)
Performance of alliances How should the performance of alliances be measured? Which factors influence the performance of alliances? Examination of terminations as alliance failure (e.g., Kogut, 1988) Partner characteristics and evolutionary dynamics that affect the success of alliances (e.g., Harrigan, 1986) Firm capabilities that enhance the success of alliances (Doz, 1996; Dyer and Singh, 1997) Influence of comembership of partners in networks on the success of their joint alliances (e.g., Levinthal and Fichman, 1988; Kogut, 1989; Zaheer et al., 1997; Gulati and Lawrence, 1997)
Performance advantages for firms entering alliances Do firms receive social and economic benefits from their alliances? Event studies of stock market reactions to alliance announcements (e.g., Anand and Khanna, 1996) Survival of firms entering alliances (e.g., Baum and Oliver, 1991, 1992) Influence of membership in networks and relative position in the network on the performance and survival of firms (e.g., Dyer, 1996; Gulati et al., 1997)
Gulati, R. (1998) “Alliances and Networks”, Strategic Management Journal, Vol. 19, No. 4, Special Issue: Editor's Choice (Apr., 1998), pp. 293-317
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Gulati, R. and P. Lawrence (1997) “Organizing vertical networks: A design perspective”, working paper, J. L. Kellogg Graduate School of Management, Northwestern University
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Gulati, R. and J. Westphal (1997) “The dark side of embeddedness: An examination of the influence of direct and indirect board interlocks and CEO/board relationships on interfirm alliances”, working paper, J. L. Kellogg Graduate School of Management, Northwestern University
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Zajac, E. J. and C. P. Olsen (1993) “From transaction cost to transactional value analysis: Implications for the study of interorganizational strategies”, Journal of Management Studies, 30(1), pp. 131-145
Gulati, R. (1995a) “Does familiarity breed trust? The implications of repeated ties for contractual choice in alliances”, Academy of Management Journal, 38, pp. 85-112
Gulati, R. and H. Singh (1997) “The architecture of cooperation: Managing coordination costs and appropriation concerns in strategic alliances”, Administrative Science Quarterly (1998): 781-814
Ring, P. S. and A. H. Van De Ven (1994) “Developmental processes of cooperative interorganizational relationships”, Academy of Management Review, 19(1), pp. 90-118
Doz, Y. (1996) “The evolution of cooperation in strategic alliances: Initial conditions or learning processes?”, Strategic Management Journal, Summer Special Issue, 17, pp. 55-83
Nohria, N. and C. Garcia-Pont (1991) “Global strategic linkages and industry structure”, Strategic Management Journal, Summer Special Issue, 12, pp. 105- 124
Gomes-Casseres, B. (1994) “Group versus group: How alliance networks compete”, Harvard Business Review, 72(4), pp. 62-74
Gulati, R. and M. Gargiulo (1997) “Where do interorganizational networks come from?”, working paper, INSEAD
Kogut, B. (1988) “A study of the life cycle of joint ventures”. In F. Contractor and P. Lorange (eds.), Cooperative Strategies in International Business, Vol. 6. Lexington Books, Lexington, MA, pp. 169-185
Harrigan, K. R. (1986) “Managing for Joint Ventures Success”, Lexington Books, Lexington, MA
Dyer, J. H. and H. Singh (1997) “Relational capabilities of firms”, working paper, Wharton School, University of Pennsylvania
Zaheer, A., B. McEvily and V. Perrone (1997) “Does trust matter? Exploring the effects of interorganizational and interpersonal trust on performance”, Organizational Science, 9(2) (1998): 141-159
Anand, B. and T. Khanna (1997) “'On the market valuation of interfirm agreements: Evidence from computers and telecommunications, 1990-1993”, working paper: Harvard Business School
Dyer, J. H. (1996) “Specialized supplier networks as a source of competitive advantage: Evidence from the auto industry”, Strategic Management Journal, 17(4), pp. 271-291.


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