Success could be measured in terms of increased profitability for the companies involved. As a result of collaborating, one or both firms may experience an increase on their return on assets and return on capital employedn as a result of rationalising their supply chain.
Therefore, it could be argued that an imbalance of power between two companies does not necessarily lead to the failure of an alliance. Often a smaller, less powerful company benefits greatly from forming an alliance with a more powerful company. The more powerful company will have a position of dominance over the weaker company but this does not prevent both companies gaining synergistic benefits from the partnership.
However, I would argue that performance criteria such as longevity and profitability do not give a fair reflection of the nature of an alliance. For example, an alliance may last several years but may be characterised by a dominant party appropriating the majority of the surplus value and the weaker party simply doing their job, gaining relatively small benefits. Similarly, both firms may experience an increase in efficiency, however, the dominant firm may be experiencing a much greater increase.
In situations of asymmetric power, despite the apparent success of both firms, in reality, the lion’s share of benefits ends up going to the powerful partner. I would suggest that this is not a truly successful partnership. This sort of alliance is also very unstable as the dominant party has no real incentive to stay in the relationship and the weaker partner would have difficulty ensuring the dominant party carries out their part of the agreement. A stronger partner may also use competitive tactics to induce a level of dependency in the weaker firm and is in a position to exploit the weaker firms core competencies. It is therefore often the case that joint ventures are terminated by the strong partner buying out the weaker partner or simply withdrawing. Furthermore, a successful strategic alliance should involve organisational learning by both companies, which is impossible if the skills gap between partners is too great. (Strategic Management Journal, 1991)
I would argue that a truly successful strategic alliance is one in which learning takes place by both parties involved and for this to happen they must be equal. In this case, where learning is the goal, the termination of an agreement cannot be seen as a failure, nor can its longevity and stability be seen as evidence of success (Strategic Management Journal, 1991).
Broadly speaking there are two different perspectives on collaboration. The traditional perspective and the alternative perspective. The former being a more cooperative approach, with a greater emphasis on joint outcomes and the latter, a more competitive approach, having a greater emphasis on individual outcomes (Strategic Management Journal, 1991). Although these have different emphasis I would suggest that in order for companies to implement them, equal power is essential.
Where a cooperative approach is taken, the two companies in the partnership are interdependent and are focused on working closely together to achieve specific goals. Each party is highly reliant on the other and the surplus value is shared equally among the parties, as both are able to negotiate from a position of relative strength. In order for this type of alliance to succeed, it is important that the partners bring complimentary skills and capabilities.
This cooperation provides the opportunity to upgrade both firm’s positions, comparatively more rapidly than could be achieved individually, through the pooling of their resources and capabilities (Grant, 1991). Inter-organisational cooperation can also result in a reduction in transaction costs and therefore enable competitive advantage through increased economic efficiency (Williamson, 1975).
This type of cooperative alliance is known as an alliance of complimentary equals and is common in hi-Tec industries where research and development costs are high. For example, the three major aero manufacturers, Rolls Royce, General Electric and Pratt & Witney cooperate because individually, they do not have the necessary financial resources to invest in R&D when developing new engines. Strategic alliances are formed on particular projects in order to reduce risk and share development cost. They can also each gain from the alliance by gaining access to new markets. This would not be successful if they were not equal in terms of technological capabilities and it is this mutual dependency that holds the alliance together. This illustrates the importance of partner selection in forming alliances. A partners’ objectives must be complimentary and the partners should be compatible in terms of resources, knowledge, technology, management style and corporate culture.
Research indicates that resource complementarity is crucial to collaborative success (Harringan, 1985; Bleeke & Ernst, 1991). There are two aspects to this; uniqueness and symmetry. Complimentarity is important in order to achieve strategic objectives (Killing, 1983) and a balance of unique strengths creates partner interdependence. When both partners are highly dependent on each other it provides them with incentive to make the relationship work and endure (Buchanan, 1992). They are more likely to share information and create a mutual understanding and are more sensitive to each others needs. An asymmetry of resources results in unilateral dependence, in which the incentive to be flexible becomes weaker (Heide, 1994).
The alliance must also be built upon trust and flexibility between the partners and should not depend on contractual obligations to sustain a successful alliance (Aulakh, P, S & Madhok, 2002) It is therefore crucial that the partners are equal. In a situation of asymmetric power, the weaker party may not trust the dominant party’s motives and fear they are acting in their own interest. Take the case of a leading U.S manufacturer of industrial products that entered into an alliance with a major Korean company. The alliance failed because the U.S company considered the Korean company as being ‘overly aggressive’ and ‘insufficiently flexible to meet changes in the market place quickly’ and the Korean company did not trust the U.S company. The two companies clearly had different objectives, which led to a lack of trust and flexibility, which ultimately led to the demise of the alliance. In todays dynamic environment flexibility is crucial as it can hold a relationship together. It results in greater adaptability to changing circumstances and reduces the chance of the relationship becoming asynchronous with the environment. A more flexible relationship is also more ‘sticky’. (Aulakh and Madhok, 2002)
A successful cooperative relationship must also be characterised by high levels of transparency and receptivity. In order for learning to take place by both parties, it is important that both parties are equally open. Providing there is symmetry in power, then both parties will be motivated to share their knowledge.
In a situation of power asymmetry collaborative drift may occur, in which the stronger partner uses these asymmetries to promote their own interests at the expense of the weaker partner. A stronger partner may be able to retain its core competencies whilst internalising its partners skills, undermining the initial goals of the partnership in the process. This erosion of mutual benefits (Holcombe, 1980), is one of the main problems partnerships face. The powerful partner captures most of the net benefits from the collaboration, to the extent that the weaker partner ends up at an inferior outcome than the pre-agreement position (McDonald, 2001)
Consider the vertical the alliance between Honeywell with NEC of Japan. NEC was to supply computer components to Honeywell and NEC viewed the alliance as an opportunity to gain economies of scale. Over time, NEC became increasingly indispensable to Honeywell because the U.S firm fell behind in technology. NEC began to fill more of Honeywell’s product and component needs. Honeywell’s core competencies and knowledge steadily flowed to NEC, making them more competent. What started as an alliance between equals of mutual benefit, resulted in an asymmetry of power which led to the powerful partner eroding the position of the weaker partner. (Child & Faulkner, 1998) This sort of relationship, characterised by value appropriation is common in competitive collaboration.
Many horizontal alliances are considered competitive as they are formed between two rival companies that manufacture the same product. The main incentive of this sort of alliance is to gain skills, knowledge and market share from your rival in order to improve your own competitive advantage. The emphasis is placed on value appropriation rather than creation and the parties involved are more likely to act in a self-interested manner (Stiles, 2001). In order for this sort of alliance to be sustained and for learning to take place, I would argue that equality is certainly a prerequisite for success. In a competitive alliance, if the power becomes asymmetric, the dominant firm is likely to behave in an opportunistic manner and seek to take advantage of the weaker firm (McDonald, 2001). As Michael Porter put it, the danger of competitive collaboration is that they can become “transitional devices rather than stable arrangements.”
The key to sustaining a competitive alliance is the relative bargaining power of the parties involved. Where both parties have something the other needs, there is a mutual hostage situation (Buckley & Casson, 1988). For example the dependence of IBM on the success of Microsoft, and vice versa meant that it was possible for these rival companies to collaborate successfully (Faulkner & De Ronde, 2000)
However, a competitive collaboration is extremely unstable due to the competitive tensions and so tends to be short-lived and fail to achieve their strategic and financial goals. Ford’s fear of Mazda as a potential competitor in the highly competitive European auto market is believed to be a major reason for the failure of their alliance (Child & Faulkner, 1998)
I would suggest that the way in which the success of an alliance is viewed determines the extent to which the partners must be equal. Taking Williamson’s Transaction Cost Theory approach, an alliance could be seen as a success in terms of reducing costs and increasing overall efficiency. This is often the case in vertical alliances formed between large buyers and relatively small suppliers, in which the companies are not equal. This sort of alliance may last for several years and experience no problems with resolving conflict so could be regarded as a success. However, I would argue that although a clearly disproportionate allocation of power may bring cohesion and stability, this does not mean, necessarily, that the strategic alliance has been a success.
A truly successful strategic alliance is characterised by equal benefits to both parties, in particular, organisational learning. Where this is the criteria for success, I would agree with the original statement that the alliance must be between equals to succeed. Both parties must have equal bargaining power and be able to negotiate from a position of relative strength, creating a situation of mutual dependency - “Each one having one element which is needed by the other for them to work. This provides good symmetry- neither is dominant’ (Jan Stiles, 2001). If the power between the parties becomes asymmetric, the alliance will fail. It may simply break up or a dominant party will start to erode the net benefits, leading to a premature end.
References
Book references:
Aulakh, P, S & Madhok (2002) Chapter 2 “Cooperation and Performance in
International Alliances: The Critical Role of Flexibility” from Cooperative Strategies and Alliances, Elsever Science Ltd
Butler, R & Gill, J (2001) Chapter 7 “Knowledge and Trust in Partnership Formation”
from Effective Collaboration: Managing the Obstacles to Success, Palgrave Publishing
Child, J. & Faulkner (1988) Chapter 5 “Managing Alliances: Challenges and Tasks”
from Strategies of Cooperation: Managing Alliances, Networks and Joint Ventures
Cox, A (1995) Chapter 1 “Strategic Procurement Management in the Private and
Public Sectors: The Relative Benefits of Competitive and Collaborative Approaches” from Strategic Procurement Management in the 1990s concepts and cases, Stamford: Earlsgate
Faulkener, D, O & De Rond, M (2000) Chapter 1 “Perspectives on Cooperative
Strategy” from Cooperative Strategy: Economic, Business and Organisational Issues, Oxford University Press
Genefke, J & McDonald, F (2001) Chapter 11, “Managing Effective Partnerships”
from Effective Collaboration: Managing the Obstacles to Success, Palgrave Publishing
Gray, B (2000) Chapter 11 “Assessing Inter-Organisational Collaboration, Multiple
Conceptions and Multiple Methods” from Cooperative Strategy: Economic, Business and Organisational Issues, Oxford University Press
McDonald, F (2001) Chapter 9 “The Role of Power Relationships in Partnership
Agreements between Small Suppliers and Large Buyers” from Effective Collaboration: Managing the Obstacles to Success, Palgrave Publishing
Olk, P (2002) Chapter 6 “Evaluating Strategic Alliance Performance” from
Cooperative Strategies and Alliances, Elsever Science Ltd
Stiles, J (2001) Chapter 2 “Managing Strategic Alliances’ Success: Determining the
Influencing Factors of Intent within Partnerships” from Effective Collaboration: Managing the Obstacles to Success, Palgrave Publishing
Sudarsanam, P. S (1995) Chapter 17, “Strategic Alliances” from The Essence of
Mergers and Acquisitions, Hemel Hempstead: Prentice-Hall
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Bleeke, J & Ernst, D (1995), “Is your strategic alliance really a sale?” Harvard
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and win”, Harvard Business Review, January-February, pp133-139
Lei, D & Slocum, J, W (1992) “Global Strategy, competence building and strategic
alliances”, California Management Review, 35 (1) pp81-97
Perlmutter, H.W. & D.A. Heenan (1986) “Co-operate to compete globally”, Harvard
Business Review, March-April, pp136-142
Pfeffer, J & Nowak, P (1976) “Joint Ventures and Inter-organisational
Interdependence”, Administrative Science Quarterly, 21