Cooperative Strategy: Managing Alliances, Networks, and Joint Ventures
Chapter 5. Motives
5.2 Strategic motivations for cooperation
The consideration of cooperative forms is driven by strategic motives, as is the choice of
partner, the selection of form, the toughness of negotiation, and the level of commitment of
the partners in overcoming the difficulties of organizing and managing alliances.
As from 1950 onwards the dramatic growth of the major multinationals, and of the
divisionalized M-form of organization occurred. Chandler suggested, the multidivisional
company replace the market in many areas in coordinating the distribution of goods and
services to the consumer. This led to administrative and bureaucratic diseconomies as the
multinationals became too large and unwieldly to operate efficiently. In the late 1970s and
1980s the system began to unravel to a degree. This period saw the growth of the venture-
capital-funded entrepreneurial firm with substantial outsourcing of non-key processes,
leading previously internalized value-chain activities to be returned to the market place. In
many cases this led to the disadvantage of fragmentation of companies, and to their
developing resource limitations. Partly in response to these forces, there has been a
dramatic growth of strategic alliances and other forms of cooperative strategy between
companies since the late 1980, particularly in the areas of technology and marketing.
Gomes-Casseres states: ‘Joint ventures may often be instruments providing firms with
flexibility in responding to trends that are difficult to predict’. Flexibility of response is the key
benefit of a real options approach to cooperative strategy. In emerging industries with untried
or immature technologies, no proven firms, and uncertain markets, potential entrants bear
high risks of failure. A portfolio of alternatives is preferable to one or two major investments,
and can be achieved at relatively low cost through a portfolio of real call options on potential
investments. Alliances can provide these options—the initial investment is relatively low,
particularly for a contractual alliance, the partners have an opportunity to learn more about
the business over time without further large investment, and the options can be allowed to
expire if low value or be exercised (usually through acquisition by one partner) if they begin
to show a high expected value.
5.2.1 Perspectives on motivation
Kogut (1988) points out three basic motivations for their formation: (a) that such a form
represents the lowest transaction cost alternative; (b) that it enables an improved strategic
position to be achieved, and/or (c) it gives an opportunity for organizational learning.
Transaction cost analyze joint ventures as an efficient solution to the hazards of economic
transactions. Strategic behavior places joint ventures in the context of competitive rivalry and
collusive agreements to enhance market power. Finally transfer of organizational skills (and
tacit knowledge) views joint ventures as a vehicle by which organizational knowledge is
exchanged and imitated.
Other motivations have come into prominence more recently. They include the need to
access superior capabilities, often in related, but not core, business areas, without actually
developing or internalizing them. From this resource-based perspective, learning is not just
about building skills internally by acquiring them in some way from partners, but of tapping
the competencies of partners without actually acquiring either the partner or its secrets.
,5.2.2 Drivers of cooperative strategies
Before discussing the specific drivers behind cooperative strategy it is worth noting that there
are two distinct rationales for such a strategy: (a) learning and (b) skill substitution. In the
complexity of an actual cooperative arrangement they may well get muddled, and
substitution may turn into learning, but both exist conceptually as distinct rationales and they
carry with them different risks.
Thus strategic alliances are generally formed because each partner feels inadequate in a
particular area of its resources or activities and wants to learn from the other partner. In skill-
substitution arrangements one partner takes over a particular activity because it is the
stronger performer. This is less risky since proprietary information is less likely to be given
away, and if the arrangement founders the partners merely need to find another partner.
However, little learning may have taken place, so the feeling of failure may be all the greater.
Such arrangements are less likely to spawn strong competitors.
5.3 External challenges
From an economic perspective, the main argument for alliances is that they are usually
formed as a result of an external stimulus or change in environmental conditions to which
companies respond with a feeling of internal corporate need that they feel is best met by
seeking a relationship with another corporation. What might be called an eclectic theory of
alliance motivation suggests that all alliances are sparked off by a change in external trading
conditions, and that this change reveals an internal resource inadequacy that needs to be
corrected if competitive advantage is to be maintained.
Cooperation between the companies, however, might be motivated unilaterally. DeFillippi
and Reed (1991) distinguish here between unilateral arrangements and bilateral agreements
(strategic alliances). Unilateral arrangements come about when one company perceives re-
source-deficiency needs that can be satisfied by another company, but the feeling is not
reciprocated by the other company. A resource is transferred in exchange for money. Such
arrangements are regularly provided in outsourcing agreements, consultancy studies, and
externally provided training courses. These are still cooperative strategies but not strategic
alliances.
Some of the key external driving forces for alliance formation at the present day are:
1. turbulence in world markets and high economic uncertainty;
2. the existence of economies of scale and/or scope as competitive cost-reducing
agents;
3. the globalization or regionalization of a growing number of industries;
4. the globalization of technology;
5. fast technological change leading to ever-increasing investment requirements, and
6. shortening product life cycles.
Competitive advantage has accrued to the company able to adopt the new technologies,
achieve economies of scale and scope, serve global markets, and change its product range
regularly. Since few companies have the internal resources and competencies to meet this
range of requirements, there has been a widespread resort to strategic alliances and other
cooperative arrangements to cope with the needs of the new economic order. These
alliances have been termed ‘scale’ alliances, since the motive for their formation is primarily
to achieve economies of scale and/or reduce development costs.
,5.4 Internal needs
Pfeffer and Nowak, and later Porter and Fuller suggest several possible reasons for
concluding strategic alliances that may be seen from the perspective of internal stimuli:
1. to achieve economies of scale and of learning with one’s partner;
2. to get access to the benefits of the other firm’s assets, be these technology, market
access, capital, production capacity, products, or manpower;
3. to reduce risk by sharing it, notably in terms of capital requirements, but also often in
respect of research and development expenditure;
4. to help shape the market—for example, to withdraw capacity in a mature market.
5.4.1 Resource dependence
Alliances may be of the defensive variety in which the partners collaborate in order to defend
their domains in the face of an external threat from a common enemy. Or they may be
aggressive, taking advantage of the globalization of their market to realize opportunities to
operate with a partner on a global scale. In either case, the motivation for the alliance is
resource based. Alone, the potential of each partner’s value chains, financial and other
resources, core competencies and skills, and networks of contacts is inadequate to achieve
its identified objectives, but together the potential synergies from cooperation are perceived
as leading to competitive advantage. Each of the partners in an alliance is likely to seek a
different resource or skill compensation from the other. Unless both are able to match their
resource or competency needs in a particular partner, then they do not have the right
partner.
Faulkner found that reputation was the strongest internal motivation for choosing the
particular alliance partner, coupled with the access to new and strong brand names that the
partner could provide. Local knowledge, marketing skills and distribution channels were other
factors commonly cited.
5.4.2 Learning
The research conducted by Powell and his colleagues provides strong evidence for the
contention that in industries which are complex and expanding, and where the sources of
expertise are widely dispersed, innovation will be found mostly in networks of learning firms
rather than in individual firms. They suggest, in fact, that the R&D intensity of such an
industry is positively correlated with the number of alliances it exhibits..
5.4.3 Risk limitation
A further factor advancing alliance formation as opposed to the alternatives of merger/
acquisition or organic development is the need to limit risk. The spreading of financial risk is
frequently cited as a fundamental motivation for the formation of strategic alliances.
5.4.4 Speed to market
Another motive behind the conclusion of strategic alliances is the need for speed in reaching
the market. Alliances are the fastest means of achieving market presence to meet an
opportunity, if the partners each have strong resources and competencies, but alone
insufficient to achieve critical mass. Internal development would take much longer, and
acquisition has the disadvantage of the possible demotivating effect of the subsidiary
relationship, and the higher level of investment required.
, 5.4.5 Cost minimization
The question of the efficiency of the alliance form in meeting a need is a further factor for an
organization to consider when deciding whether or not to pursue the alliance route. The
efficiency criterion is captured in transaction-costs theory, which holds that companies will
form alliances, rather than adopt other strategic options, only if the transaction costs involved
in so doing are perceived to be lower than those for the other options. Before adopting the
transaction-costs perspective—that is, the efficiency motivation—as a necessary and
sufficient criterion for alliance formation, it should be noted that transaction-costs analysis
ignores a number of factors, which critically influence decision-makers. As Ring and Van de
Ven point out, transaction-costs analysis deals only with costs and hence efficiency, but does
not allow equity or fairness to play a part in the decision-making process.
Transaction-costs analysis also neglects to value the importance of trust in establishing
alliances. An alliance may be proposed to minimize transaction costs, but if the partners
mistrust each other it is unlikely to be a successful alliance. Finally, transaction-costs
analysis does not take adequate account of the varying levels of risk involved in different
governance structures. Alliances have in general a fairly high level of risk. They involve less
investment than acquisitions or internal development, and only come about after extensive
negotiation, but they still involve unfamiliar actors working together across company
boundaries. Acquisitions generally carry the highest level of risk.
5.4.6 Current poor performance
Bolton suggests in her research that a prime motivator for becoming involved in cooperative
activity, particularly in innovative R&D, is existing poor performance. This leads the top
management of the organization to seek out a means of changing the formula it is presenting
to the market. Cooperation is a readily available means of doing this. This is explicable by
reference to an implied risk profile. If performance is currently poor, there is little to be lost by
finding something different to do in order to improve results. Such an incentive is much
weaker when things are currently going well, although an alliance may still be considered to
address a deficiency that is thought likely to impact on performance in the longer term.
5.5 Conclusion
Alliances need for their initial stimulus a challenge from a changing external environment. If
then an organization develops a feeling of resource deficiency in relation to such an external
change, or if it wants to spread risk, or needs to get into a market fast, and believes that the
transaction costs of an alliance would be less than those incurred from internal development
or acquisition, then the motivation for an alliance exists. If a partner can be found with a
similar and complementary motivation, then the circumstances for the conclusion of an
alliance are in place. So runs the economic argument for the establishment of alliances.
Ultimately neither transactions costs, the extent of risk, nor future economic benefits can be
known at the time the decision is taken to set up an alliance. There must, therefore, also be a
political motive for the alliance, perceived by a coalition of the company’s key decision-
makers.
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