Managerial and organizational perspectives
Managerial and organizational perspectives
Abstract and Keywords
Chapter 3 describes the contributions of managerial and organizational perspectives, namely strategic management theory, game theory, bargaining power theory, organization theory, and stakeholder theory, to the understanding of cooperative strategy. Strategic management theory draws attention to the need for prospective partners to achieve a fit between their respective strategies so as to achieve each party’s objectives. Game theory provides valuable insights into the possible attitudes of one’s partner in cooperation. Bargaining power models provide expectations for how the relative contributions of partners determine the structure and strategic direction of cooperative ventures. Organization theory’s contribution comes through its consideration of resource dependency in relation to partner power and control, learning, and how to organize alliances. Stakeholder theory suggests that when firms seek cooperative solutions to joint needs, they become stakeholders in each other’s organization and thus incur an interest in the success of their partners as well as themselves.
3.1 What this chapter covers
This chapter describes the contributions of managerial and organizational theories to the understanding of cooperative strategy. It begins with strategic management theory, which draws attention to the motives for forming alliances, the selection of partners so as to achieve compatibility between their goals, and the need to achieve integration between partner cultures and systems. Game theory is then considered as a set of techniques that highlight the importance of understanding the consequences of cooperative and non-cooperative behavior in a given situation, assuming rationality. The so-called prisoner’s dilemma is singled out as particularly indicative of the behavioral options in a relationship between two partners. We then consider bargaining power models, in which potential partners seek advantageous terms depending on the importance of their contributions. Organization theory’s contribution comes through the resource dependency perspective and through a consideration of how to organize alliances. It also emphasizes the importance of trust in cooperative activity, without which alliances are likely to be short-lived. Trust is discussed at greater length in Chapter 4. Yet another perspective on organizational activities with relevance to cooperative strategies is organizational learning theory, which proposes that organizations, like individuals, must continually seek new knowledge to maintain their competitive positions. Alliances can be important sources of external knowledge, both for temporary use during the period of cooperation and in the longer term if a firm can absorb the knowledge of its partner. Finally, stakeholder theory looks at the firm as a societal actor as well as an economic entity. Removing assumptions of potential conflict in every inter-firm transaction gives us a different view of the roles of partners in cooperative ventures.
3.2 Strategic management theory
The perspective offered on cooperative strategy by strategic management theory (SMT) draws attention to the need for prospective partners to achieve a fit between their respective strategies so that an alliance between them makes a positive contribution to the attainment of each party’s objectives. SMT has also been concerned, though to a lesser degree, with the desirability of achieving another area of fit—namely, that between (p.45) the organizational and national cultures which the partners bring to their cooperation. The burgeoning literature on strategic management contains a number of key overlapping themes that are relevant to cooperative strategy. These concern (1) the motives for forming alliances, (2) the selection of partners so as to achieve compatibility between their goals, and (3) the need to achieve integration between partner cultures and systems. Later chapters treat each one of these themes at greater length. Chapter 8 examines the motives behind cooperative strategy. Chapter 9 looks at partner selection. The chapters in Part IV consider how a cultural and operational fit can be developed through successful alliance management. In this last area, contributions from SMT join with those from organization theory.
Much of the strategic management work on alliances to date has concentrated on their antecedents rather than on their management. Thus, analyses of reasons for setting up alliances, forming objectives for those alliances, and identifying areas of possible conflict abound in the literature (Harrigan 1988). Tallman and Shenkar (1994), for example, suggest ways in which multinational enterprises might approach the issue of alliance formation as an alternative approach to acquisition or internal development. From a slightly different tack, Contractor and Lorange (1988) identify a number of reasons for alliance formation that are by no means mutually exclusive. These range from risk reduction, through achievement of scale economies, to co-opting or blocking the competition. Faulkner (1995) classifies the motives for alliance formation into internal and external ones of which the main internal ones are, he claims:
1. Motives stemming from the resource dependency perspective, e.g. need for specific assets or capabilities not currently possessed;
2. The minimization of transaction costs;
3. The need for speed to market not achievable by other means;
4. The spreading of financial risk.
Faulkner suggests that the key external motives for alliance formation in the current international business situation are those surrounding the issues of globalization or regionalization; those concerned with international turbulence and uncertainty; and those concerned with the need for vast financial resources to cope with fast technological change and the shortening of product life-cycles.
Logically following on from the strategic motives for alliance formation is the question of partner selection. Geringer (1991) examined previous research on the selection of international joint venture partners that he concluded was vague regarding selection criteria. As a clarification, he distinguished between two categories of selection criteria. “Task-related” criteria are those which “refer to those variables which are intimately related to the viability of a proposed venture’s operations” (1991: 45), and include features such as access to finance, managerial and employee competencies, site facilities, technology, marketing and distribution systems, and a favorable institutional environment (or a partner’s ability to negotiate acceptable regulatory and public policy (p.46) provisions). By contrast, “partner-related” criteria refer to those variables that characterize the partners’ national or corporate cultures, their size and structure, the degree of favorable past association between them, and compatibility and trust between their top management teams.
A number of strategic observations can be drawn from Geringer’s work and that of others on partner selection. Firstly, the relative importance of a given task-related criterion appears to depend on the partner’s perception of how crucial the feature is for the cooperative venture’s performance, how strong the partner’s ability to provide or gain access to the feature is, and how difficult the partner thinks it will be in the future to compete in terms of the feature. If, for example, a company perceives technology leadership to be crucial for the venture’s performance (and indeed its own), but that it cannot provide this on its own, it will logically give high priority to finding a partner with which an alliance will be capable of securing that leadership. Secondly, the selection criteria applied by partners to an alliance between firms from developed and less developed countries tend to differ quite clearly (see Chapter 22). The former group are generally oriented toward market access and accommodation to governmental regulations that may restrict that access to firms investing directly in the country. Low-cost production and access to scarce materials are also sometimes priority criteria for firms from developed countries. Firms from developing economies firms normally seek access to technology, know-how, managerial expertise, capital, and international markets.
The identification of partner-related criteria brings us to the third key theme within the SMT perspective. This has been expressed in terms of the need to secure a “cultural fit” between cooperating partners in order that they can work together effectively and have a sound basis on which mutual confidence can develop (Bleeke and Ernst 1993; Faulkner 1995). According to Faulkner, the requirement is for the partners to have sufficient awareness and flexibility to be able to work together constructively; in other words, to be able to learn from each other’s cultural differences and to be able to bring together their respective management systems, capitalizing on the strengths of each. This theme is receiving more attention within both the strategic management literature and alliance practice, and raises the important question of how much autonomy a cooperative unit, such as a joint venture, should enjoy from its parent partners in order to have the freedom to develop a good cultural fit in terms of its own identity and way of operating (cf. Lyles and Reger 1993).
SMT emphasizes that firms enter into cooperative relations in order to achieve expansion and growth as well as to secure efficiencies of the kind identified by TCE. It draws attention to the external and contextual factors that encourage a cooperative strategy. In so doing, it develops a contingent view on the merits of a cooperative as opposed to a competitive strategy, and on the criteria for selecting a partner. This contingent view is more sophisticated and realistic than the universalistic rationales contained in the MPT and TCE perspectives. It also emphasizes the matching of partners rather than looking at cooperation simply from a single partner’s point of view, as again do MPT and TCE. A further contrast with these two major economics perspectives lies in (p.47) the way that strategic management theory brings the actor into play. Rather than positing that situational contingencies determine which cooperative strategies will be successful, SMT allows for the exercise of strategic choice by the actors who are deciding on firms’ policies (Child 1997).
3.3 Game theory
Game theory is concerned with the prediction of outcomes from “games,” which are social situations involving two or more actors (players) whose interests are interconnected or interdependent (Zagare 1984: 7). The nature of a game might be sporting (as with poker), financial (as with bargaining over pay and other contracts), or military. Game theory is concerned with the strategies adopted by the players to a game and the effects these have on the game’s outcome. Its insights should therefore be of direct relevance to the understanding of cooperative strategy.
Kay (1993: 152–3) distinguishes between two categories of strategic alliance—the “common-objective” alliance and the “mutually-beneficial exchange” alliance. The former is typically one in which the partners possess distinctive capabilities which complement each other. Examples are the cooperation between Apple and FoxConn and the many alliances between small biotechnology firms and large pharmaceutical firms for the production and sale of biotechnology-based ethical drugs. In mutually-beneficial exchange alliances, each partner possesses expertise, information, or skill that is of value to the other, an example being General Motors’ cooperation in manufacturing with Toyota in the 1990s. In this alliance, called NUMMI, GM learned about lean production manufacturing, while Toyota benefited from access to the American market. Applying the logic of game theory, Kay concludes that in a common-objective alliance cooperation is a dominant strategy for both partners—it pays both partners to put the maximum effort into attaining the common objective. In the case of a mutually-beneficial exchange alliance, however, the dominant strategy for both partners is to hold back—in other words, to get as much as possible while giving as little as possible. This is the prisoner’s dilemma situation, in which self-interest is not maximized by cooperation even though joint interest may be.
The prisoners’ dilemma game is a two-person game. Two-person games are the most elementary, serve to highlight the dilemma that may attend the choice between a competitive and a cooperative strategy, and can be seen as particularly relevant to alliance situations. While game theory assumes that players are self-interested, it does not go on to the further assumption that competitive behavior necessarily follows. This is the case in the often employed prisoner’s dilemma game, which has two versions relevant to the choice between competitive and cooperative strategies. The dilemma is that, while cooperation will maximize joint interest, it does not necessarily maximize self-interest—at least for a particular transaction at a particular moment of time. In addition, if one (p.48) player cooperates while the other defects from the cooperation, the latter typically will gain at the expense of the former. If neither party cooperates, they will both lose though not to the extent of the loss incurred by the non-defecting party when the other reneges.
The traditional version describes situations in which players are logically condemned to defect in a single-play game. This derives from a model first developed in 1951 by Merrill Flood of the Rand Corporation and later termed “the prisoner’s dilemma” by Albert Tucker. It addresses the issue of how we individually balance our innate inclination to act selfishly against the collective rationality of individual sacrifice for the sake of the common good. John Casti (1992: 198) in his book Paradigms Lost illustrates the difficulty effectively:
In Puccini’s opera Tosca, Tosca’s lover has been condemned to death, and the police chief Scarpia offers Tosca a deal. If Tosca will bestow her sexual favors on him, Scarpia will spare her lover’s life by instructing the firing squad to load their rifles with blanks. Here both Tosca and Scarpia face the choice of either keeping their part of the bargain or double-crossing the other. Acting on the basis of what is best for them as individuals both Tosca and Scarpia try a double-cross. Tosca stabs Scarpia as he is about to embrace her, while it turns out that Scarpia has not given the order to the firing squad to use blanks. The dilemma is that this outcome, undesirable for both parties, could have been avoided if they had trusted each other and acted not as selfish individuals, but rather in their mutual interest.
Analytically, there are two parties and both have the options of cooperating or defecting. If the maximum value to each of them is 3 (a positive benefit with no compromise involved) and the minimum value 0, then the possible outcomes and values for A are as follows:
• A defects and B cooperates: A scores 3 (and B scores 0; total 3). Tosca gets all she wants without making any sacrifices. This would have happened if Tosca had killed Scarpia, and Scarpia had loaded the rifles with blanks enabling Tosca’s lover to escape death.
• A cooperates and B cooperates: A scores 2 (and B scores 2; total 4). Tosca, although saving her lover’s life, has to submit sexually to Scarpia in order to do so, which is presumed to represent a sacrifice for her. Similarly, Scarpia’s compromise involves not killing Tosca’s lover.
• A defects and B defects: A scores 1 (and B scores 1; total 2). This is what happened. At least Tosca has killed the evil Scarpia, but he in turn has killed her lover. Not a successful outcome for Tosca or Scarpia, but marginally better for her than the fourth possibility.
• A cooperates and B defects: A scores 0 (and B scores 3; total 3). This is the worst outcome from Tosca’s viewpoint. She has surrendered herself to Scarpia, but he has still executed her lover. This “sucker’s pay-off” is to be avoided if at all possible.
The dilemma is that since Tosca (A) does not know what Scarpia (B) will do, she will rationally defect in order to avoid the sucker’s pay-off. Thus, she may score 3 if Scarpia is (p.49) as good as his word and she can make him the sucker. She will at least score 1. If both cooperate they will each score 2, which is the best joint score available, but, in the absence of trust, this is unlikely to be achieved.
In the situation of a strategic alliance, the optimal joint score can be achieved only through genuine trusting cooperation; yet this may be difficult to achieve if both parties in the alliance are overly concerned not to be the sucker, and are thus reluctant to release their commercial secrets, for fear that their partner will defect with them. This was the problem that Robert Axelrod (1984) set out to examine through an interesting set of experiments. The issues he addressed were:
1. How can cooperation get started in a world of egoists?
2. Can individuals employing cooperative strategies survive better than their uncooperative rivals?
3. Which cooperative strategies will do best?
Axelrod invited a number of academics to participate in a contest pitting different strategies against one another in a computer tournament. Each participant was to supply the proposed best strategy for playing a sequence of prisoner’s dilemma interactions in a round-robin tournament. The winning strategy was the simplest—namely, Anatol Rapoport’s (1961) strategy of tit-for-tat. It had two rules only:
1. cooperate on the first encounter;
2. thereafter do what your opponent did on the previous round.
Such a strategy was a forgiving one, which implied a willingness both to initiate and to reciprocate cooperation. If both partners did indeed cooperate on the first round, then cooperation would continue. However, if only one cooperated on the first round and the other defected, thus creating a sucker in the first round, then the cooperator would defect in the second round to show the defector the error of its ways and the penalty for defection. The results were confirmed in a second tournament. The conclusions were that in a multiple-play game the key is to be cooperative and forgiving but to retaliate when appropriate without being vindictive. As Axelrod (1984: 112) summed up:
Tit-for-tat won the tournaments not by beating the other player but by eliciting behavior from the other player that allowed both to do well. So, in a non-zero sum world you do not have to do better than the other player to do well for yourself. This is especially true when you are interacting with many different players … The other’s success is virtually a prerequisite for doing well yourself.
This second version of the prisoner’s dilemma game provides for the essence of cooperative strategy. Applied to strategic alliances, this series of experiments suggests:
1. The rational strategy of defection (competition) applies on the assumption of a zero-sum game and a non-repeatable experience. That is, it applies if you are in business only for a single trade, such as buying a souvenir in a bazaar in Morocco. In this situation, defection (i.e. bargaining as hard as you can) is a rational strategy for you to pursue. (p.50)
2. As soon as the game becomes non-zero-sum, possibly because cooperation is starting to provide economies, and/or it is known that the game will be played over an extended time period, the strategy of defection is likely to become sub-optimal. To cooperate and keep your bargain is a better strategy for both players. If you do not, it will at the very least harm your reputation.
3. In these circumstances, forgiving cooperative strategies are likely to prove the most effective.
Although the short-term dominant strategy can be shown as defection in a one-play prisoner’s dilemma game, this does not apply in a multiple-play game with an indeterminate end. Nor does it apply if the penalty for defection is made very high. Thirdly, it does not apply if the partners value working together and care about their reputation in the wider business community. A strategic alliance partner who is seen to defect can find it very difficult to attract future partners. We must note, though, that an exceptionally high reward for defection—such as accessing key knowledge for the defecting parent firm in a setting with weak intellectual property protection (the case in many emerging markets)—may make the termination of the alliance a relatively small price to pay for opportunism.
Iterated versions of the prisoner’s dilemma game analyze how cooperation evolves when the players have a possibility of meeting again and therefore have a stake in their future interaction. Axelrod (1984) refers to this as the future casting a shadow over the present situation. When this is the case, Axelrod argues that cooperation as a social process can develop in three stages. First, it may commence, even in a context where unconditional defection is the norm, with small clusters of individuals who base their cooperation on reciprocity and have a sufficient proportion of their interactions together. Next, a strategy based on reciprocity can thrive alongside other strategies. Thirdly, once firmly established and accepted on the basis of reciprocity, cooperation can protect itself from invasion by less friendly strategies so long as the collaborators retaliate in response to a first defection. However, while this approach works well in computer simulations, it is rarely found in real life, where defection generally leads to the breakup of the collaboration as trust dissipates.
Iterated games also suggest that the probability of cooperation may be improved initially by providing mutual hostages and then progressively reinforced by the benefits it is seen to provide. Gulati et al. (1994) stress the significance of partners making unilateral commitments. They conclude from research on seventeen companies engaged in alliances that one shortcoming of the prisoner’s dilemma framework lies in the way it underestimates the importance of partners acting unilaterally to make commitments that enhance the possibility that all the partners will cooperate. They conclude that such unilateral commitments can be vital to the success of alliances.
Parkhe (1993: 799) summarizes the process whereby cooperation is reinforced through iterations, under conditions postulated by game theory:
Experimental evidence suggests that although noncooperation emerges as the dominant strategy in single-play situations, under iterated conditions the incidence of cooperation rises (p.51) substantially … Similarly, in strategic alliances, cooperation is maintained as each firm compares the immediate gain from cheating with the possible sacrifice of future gains that may result from violating an agreement … The assumption here seems intuitively reasonable: broken promises in the present will decrease the likelihood of cooperation in the future. By the same token, cooperation in the current move can be matched by cooperation in the next move, and a defection can be met with a retaliatory defection. Thus, iteration improves the prospects for cooperation by encouraging strategies of reciprocity.
Ridley (1996) suggests two alternative strategies that in real life have been found to be more effective than pure tit-for-tat: Pavlov and Firm-but-Fair. Pavlov posits that players will continue to do things that are rewarded and stop doing things that are punished. However, Pavlov is also powerless against continual defectors. In Firm-but-Fair, actors act successively and can communicate with each other, unlike in the strict prisoner’s dilemma model. This leads them to cooperate with cooperators, return to cooperating after mutual defection, and punish a sucker by further defection, but it assumes that they continue to cooperate after being a sucker in the previous round, which neither tit-for-tat nor Pavlov do. Thus, the motivation to cooperate and to continue to cooperate in an alliance is very strong in game theory terms if the alliance is set up in the right way.
Nalebuff and Brandenburger (1996) argue that game theory is a way of thinking—a tool for analysis—that is well suited to assessing the likely consequences of competitive and cooperative behaviors in conditions where the benefits to one player depend on what the others do, and where in a complex world there are many interdependent factors so that no decision can be made in isolation from a host of other decisions. Their central tenet is that business has to recognize the duality between cooperation and competition—which they call “coopetition.” Luo (2004) defines coopetition as simultaneous competition and cooperation between global rivals, and claims that it is “an emerging landscape” of global business. It is, however, a way of thinking that may be more novel for Western managers than for their counterparts in regions such as East Asia who have long been familiar with the practice of cooperating through business networks (Biggart and Hamilton 1992).
Game theory, then, makes valuable contributions to the analysis of cooperative strategy by pointing to situations in which this strategy may be rewarding and also the conditions under which it may be undermined. In its present forms, game theory relies on a number of simplifying assumptions, such as the personalities of the players, their social ties, verbal communication between the players (and the emotional and norm-building consequences of such communication), uncertainty about what the other player actually did at previous points in the game, and the social conventions and institutional rules in which the players and their interactions are embedded. Game theory also reduces firms to single actors and has difficulties in coping with the differentiation of roles, perceptions, and interests within them. Nevertheless, it continues to have tremendous potential for advancing our understanding of the intrinsic nature of business cooperation.
As potential partners in a cooperative strategy consider their strategic moves in building an alliance, whether contractual or equity-based, their relative power in the dyadic relationship becomes critical. Cooperation arises from bargaining between (or among) the participants—failure to reach mutually acceptable terms eliminates a cooperative solution, as one-sided or hostile alliances are not viable solutions. Firms can build their internal capabilities unilaterally and can tender an unfriendly takeover offer if they are willing to pay the price. In the case of alliances, though, both must agree to the terms of the cooperative agreement, although clearly one side may be more enthusiastic than the other. Bargaining power models address the process of creating alliances in a condition of unequal motivations and endowments and address how relative strengths and weaknesses influence the deal and also influence the potential returns to each of the partners, sometimes in unexpected ways (Yan and Gray 1994).
Any time two or more entities wish to resolve differences in the search for mutual benefit, a bargaining process will take place (Bacharach 1981). A key aspect of bargaining between alliance partners is the sense that contributions and expected benefits are roughly balanced—if one side makes a greater contribution, it would expect to accumulate greater benefits than the less-committed partner (Robinson 1969). Bargaining power is the ability to influence the outcome of negotiations, and is tied to the wants and needs of the partners (Salancik and Pfeffer 1977; Gomes-Casseres 1990). Power is typically seen as evolving from the control of strategic resources that are essential to the success of a cooperative strategy (Blodgett 1991), since an alliance cannot be structured without essential assets. Yan and Gray (1994) tested the impact of technology, market access, local knowledge, management expertise, and equity share on control over international joint ventures in China and found positive, if weak, outcomes. Mjoen and Tallman (1997) found that the relative contribution of resources was positively related to bargaining power for a set of Norwegian IJVs, that bargaining power was positively related to both equity share and control, but that equity ownership was not related to control (see also Chapter 11). They conclude that in equity joint ventures, equity share and therefore access to profits in the form of dividends is closely tied to bargaining power. Bargaining power also drives the sense of control over the alliance as a whole and over the application of those specific resources provided by that partner. Thus, bargaining power does seem to enhance strategic control for the stronger partner, and increases the equity position of the stronger partner in equity-based alliances, but control and equity share are not significantly related. The bargaining power model of alliance control seems to work best as an extension of the resource-based view, demonstrating how resources can translate into organizational characteristics. Again, though, bargaining power can only be applied within boundaries of perceived fairness—if the weaker partner feels disadvantaged, cooperation will fail and neither partner benefits from resource complementarities and efficiencies.
The role of the legal contract in establishing and maintaining cooperative ventures is critically important, especially in the face of changing circumstances, even if often overlooked or downplayed in the management literature. As contracts are typically designed to minimize the possibilities for the sort of opportunism or self-interested dealing emphasized in game theory and bargaining power models, this seems to be an appropriate place to discuss contracts in relation to cooperative strategies and structures. Peter Smith Ring is a major voice in the role of contracts in inter-organizational relationships and cooperative forms in particular. He particularly points to the reliance on the concept of contract to theories of the firm such as transaction cost economics and agency theory (Ring 2006). He sees “the concept of contract” (2006: 173) as functioning both as a formal statement of governance relationships for transactions and as an expression of the psychological contract between contracting parties.
Ring and Van de Ven (1992) place contract-based cooperative relationships squarely between markets and hierarchies as governance forms for transactions between firms. They assess the relative appropriateness of each of four forms of governance—markets, recurrent contracts, relational contracts, and hierarchies—based on assessments of risk and trust between transactional partners. When a successful transaction relies heavily on trust, or confidence in the partner to perform as specified, a contractual form is most appropriate. Markets rely on clear understandings of all aspects of the transaction to allow a relatively simple exchange, and hierarchies eliminate concerns for opportunism by internalizing the exchange. Trust, they argue, is the principal social control over contracting (see also Chapter 4). In the case of lower risk transactions, recurrent contracts allow trust to build over time and increasing numbers of transactions between partners. Multiple contracts allow the firms to remain independent rather than incurring the costs and loss of incentives that characterize hierarchy, while allowing the partners to engage in increasingly important (risky) joint activities. Increasing trust leads to more flexible, less detailed contracts. High risk, high trust transactions, alternatively, suggest the use of relational contracts. Such contracts tend to substitute for the creation of a hierarchical relationship, and require high levels of trust, as the partners are putting important assets at risk. Ring and Van de Ven suggest that such contracts build endogenous social controls into the contract, offering the opportunity for shorter, more loosely specified, more flexible contracts. They note that relational contracts may evolve from a series of recurrent contracts, or alternatively may result from outsourcing previously hierarchical transactions.
Contracts tend to be seen as legal documents that serve as tools for enforcement of cooperative agreements under the threat of legal action (Mayer 2006). In this vein, contracts are often seen as the antithesis of trust or inter-partner relationships. However, various studies have demonstrated that good contracts are positively correlated with good partner relationships. Poppo and Zenger (2002) show that contracts may expand (p.54) even as the partner relationship develops over time. They suggest that a well-designed contract is beneficial to a long-term alliance. Mayer (2006) states that the contract can lay out clearly the roles and responsibilities of the parties, and help to ensure that the partners expect the same structure, easing the working relationship while minimizing opportunism. A longer prior relationship helps the partners to properly specify the agreement through a more complete contract, rather than replacing a contract with relational ties—the two seem to be complementary more than substitutes for governance.
Ryall and Sampson (2006) conclude that lengthy relationships seem to lead to more complete contracts, while multiple simultaneous cooperative arrangements tend to result in shorter contracts. They also note that contracts often include non-enforceable terms, which they interpret (much as does Mayer as cited above) that the contract is as much about establishing a blueprint for the cooperative arrangement as it is about providing legal recourse in the event of a breakdown. As Grandori and Furlotti (2006) have it, contracts define and protect important features of the cooperative organization as much as they provide legal grounds for responses to opportunism.
3.6 Organization theory
Organization theory embraces a range of perspectives that offer insights on three main aspects of cooperative strategy. First, there is the significance of resource provision and scarcity in cooperative strategies and relationships. The resource-dependence perspective is of central importance here, and can inform both the general issue of why inter-organizational cooperation is sought as well as the more specific question of how the investments partners make in alliances bear upon the control they can exercise over the management of the alliances. Secondly, there are the ways in which alliances can be appropriately organized. This issue is informed by network analysis and work on transnational business organization. The third aspect concerns the nature of trust within inter-organizational cooperation, on which there is a growing body of recent research. The first two of these aspects are now considered. The question of trust is so fundamental to cooperation between organizations that it is discussed separately in the next chapter.
3.6.1 Resource-dependence perspective
The resource-dependence perspective is concerned with the arrangements that are negotiated between organization managers and the external stakeholders, or organizational partners, who contribute necessary resources in the expectation of receiving valued returns. With its focus on needed resources, this perspective contributes to our understanding of why firms, or other organizations, undertake cooperative strategies. It raises as a strategic issue the problem organizations face of how to deal with uncertainties (p.55) about their supplies of resources and human competencies. It indicates that, when resources and competencies are not readily or sufficiently available to firms, they are more likely to establish ties with other organizations.
According to Pfeffer and Salancik (1978), resource scarcity prompts organizations to engage in inter-organizational relationships in an attempt to exert power, influence, or control over organizations that possess the required resources. They tend to emphasize the conflictual and coercive side of relations between organizations. Resource scarcity may, however, also encourage cooperation rather than competition, so giving rise to relationships based on mutual support rather than on domination. This is likely when the potential partners to an exchange anticipate that the benefits of forming a cooperative inter-organizational relationship will exceed its disadvantages, including the cost of managing the linkage and the diminution of decision-making latitude.
Consistent with this attention to resource scarcity is the view that emphasizes the competitive importance of a firm possessing a portfolio of core competencies and value-creating disciplines (Hamel and Prahalad 1994). Similarly, Hall (1992, 1993) has been concerned with identifying the intangible sources of sustainable competitive advantage associated with the possession of relevant advantages in capability over competitive rivals. These intangible resources encompass assets such as patents, trademarks and data, and human competencies such as know-how and learning capabilities. The implication of this “resource-based” perspective is similar to the resource-dependence argument—namely, that a strong reason for organizations to collaborate with others lies in their recognition that they lack critical competencies that they cannot develop readily, and/or sufficiently rapidly, on their own.
The resource-dependence perspective also contributes to an understanding of the relation between resource provision and control within strategic alliances. The ability of business investors to exercise direction over the firms in which they have an ownership stake is an issue of long-standing concern (cf. Berle and Means 1932). It assumes a new form, however, in those types of cooperation in which the partners take an equity stake, notably equity joint ventures. Unless they are simply portfolio investors adopting the role of sleeping partners, the joint-venture owners will normally contribute much more than just equity capital. In establishing joint ventures to exploit complementarities between themselves, the owners provide skills and knowledge as well. These are assets in the possession of partner firms. They have intrinsic value and amount to ownership inputs with property rights. They confer powers of control over a joint venture both through the formal terms of any contracts by which they are provided, and through the less formal influence that derives from the partner’s possession of scarce expertise and resources (cf. French and Raven 1960; Child and Yan 1999). Since an owning company faces the problem of protecting the use and integrity of its investments when collaborating with a joint-venture partner, it has a motive for seeking a certain level of control (Hamel 1991).
In treating the relation between resource provision and control, the resource-dependence perspective builds upon Emerson’s (1962) observation that dependency in (p.56) a social relation is the reverse of power. Pfeffer and Salancik (1978) developed this notion to argue that the ability of external parties to command resources that are vital for the operations of an organization gives those parties power over it. In the case of a joint venture, this means that a parent firm which contributes a resource necessary for the venture’s success, and that the other parent cannot easily provide, will gain power relative to the partner and relatively greater control over the joint venture. It also implies that a parent’s control will be focused on those activities of the joint venture to which it contributes resources.
Some have suggested that the implications of resource dependence for joint-venture control may be mediated by the bargaining powers of prospective partners (Fagre and Wells 1982; Lecraw 1984). They posit that prospective partners can negotiate for a level of joint-venture control, “given the assets that they command and perhaps general trends that may or may not be currently in their favor. Equity ownership is seen as an outcome of negotiation, a representation of relative power between participating interests” (Blodgett 1991: 64). While much of the bargaining power available to prospective partners is likely to arise from their command of significant resources in the first place, as we saw above, this perspective allows for an element of negotiated indeterminacy in the extent to which the command of resources leads to control.
Reference to bargaining power thus warns against an assumption that the impact of resource provision on control in alliances is entirely deterministic. Pfeffer and Salancik’s own analysis allows for the ability of firms to manage and avoid dependence. Similarly, the non-dominant partners of joint ventures may be able to reduce their resource dependency over time—for example, through the superior learning process that Hamel (1991) has documented. There are also reasons to expect that even resource-dominant parent companies may choose to exercise their control over joint ventures selectively, depending on their cost/benefit assessment of assuming responsibility for the various areas of joint-venture activity rather than leaving this either to their partners or to the venture’s own management. Such an assessment would compare the strategic importance of securing control over different activities against the costs involved, and it would take into account the net benefit of adopting alternative control mechanisms as well (see Chapter 11).
The resource-dependence theory, being concerned with the exercise of power, contributes a political perspective. This can be applied both to the relations between partner organizations and to the impact on the internal dynamics of an alliance of dependence on partners or other “external” parties. While resource dependence’s emphasis on the balance between partner or other stakeholder contributions and returns is broadly consistent with the focus of game theory, the processes it uncovers are far more complex and evolutionary than is readily incorporated into game theory. There are dynamics both around the interaction of organizational members with external networks, and around coalitions within the firms themselves. In this respect, the resource-dependence perspective is closely related to strategic-choice analysis, which also draws attention to the intra- and inter-organizational political dynamics overlooked by many other perspectives (Child 1997).
(p.57) This perspective is complementary to the “resource-based” perspective described in Chapter 2, which makes a qualitative distinction between human and other types of resource, in stressing the vital contribution that the former makes to a company’s performance (Hamel and Prahalad 1994). The resource-based perspective breaks with the product/market paradigm followed by market-power theory and many students of strategic management. It highlights the importance of human competence requirements as a stimulus to embracing a cooperative strategy, as well as to the significance of managing alliances in such a way as to secure motivation and synergy among the staff who are brought together from the previously separate partner organizations. However, as an essentially economic perspective, the resource-based model does not consider the motivations of actors in alliances in the same way that an organizational perspective such as resource dependency does.
3.6.2 Organizational perspectives
The growing number of strategic alliances presents managers with the practical requirement of how best to organize these entities. They have not as yet received a great deal of guidance from organization theorists, whose conventional assumptions are challenged by the “hybrid” nature of strategic alliances. Moreover, as Borys and Jemison (1989) point out, the varied forms of alliance make them particularly difficult to analyze. The organizational requirements of alliances on which most attention has so far been directed are (1) the relative importance of structure and process in their management, (2) their network (or quasi-network) character, and (3) issues of control, autonomy, and learning. Later chapters discuss these topics in more detail, and they are introduced only briefly at this point.
The question of how theoretically and practically useful it is to focus on the structure rather than the process of strategic alliances was first raised in respect of decentralized multinational corporations (DMNCs). Doz and Prahalad (1993: 26) have argued that:
Except in advocating a matrix organization, which is another way to acknowledge structural indeterminacy, a structural theory of DMNCs had little to offer. One needs a theory that transcends the structural dimensions and focuses on underlying processes. Issues of information and control become essential. More than the formal structure, the informal flow of information matters. So do the processes of influence and power, such as how the trade-offs among multiple stakeholders and multiple perspectives are made.
This argument applies even more to strategic alliances which, being generally shorter-lived and subject to more frequent reconfiguration than multinationals, can rely even less on formal structures. While formal channels for reporting back to parent or partner companies on financial, operational, and technical matters are absolutely necessary, there is a particular need in alliances for effective informal information exchange. This is both to promote the bonding and trust which will lead to a better cultural fit, and to (p.58) ensure that the alliance is sufficiently adaptive to its environment. In other words, information flow is essential to achieve cultural fit and learning within the alliance. Unless an alliance is managed in a completely asymmetric manner, with one partner dominating all executive functions, it has to rely upon open and effective information flows between the partners, the staff they appoint to their cooperative ventures, and other staff who are recruited specifically for the alliance. There is no other way for it to be organized than as a pluralistic enterprise.
At the same time, however, we are reminded by resource-dependence theory that the processes of influence and power are also inherent in an alliance. Alliance partners may even compete for control over areas such as the management of its technology either to safeguard proprietary knowledge or to acquire such knowledge. The founding of alliances on the logic of exploiting complementarities between the partners may in any case make it sensible for each of them to assume responsibility for certain of its activities and decisions. The alliance must also perform according to certain goals and standards, which in turn require monitoring. These considerations bring the question of control into prominence. The challenge is how to organize an alliance and its links to the partners in such a way as to define their respective roles and, having done so, to build in the required degree of control over the alliance’s behavior and performance.
The organization of cooperative activities can assume many forms. One form is the alliance that is dominated by one partner and structured more or less on the hierarchical lines of a so-called “conventional” organization. Killing (1983) in his study of equity joint ventures found that this “dominant-partner” model was associated with superior economic performance, and he therefore recommended its adoption wherever possible. It does not, however, represent a truly cooperative strategy and may forgo some contributions that the non-dominant partner could otherwise offer. At the other end of the spectrum is the network model, which views the collaborating partners as linked together by a variety of relationships (Nohria and Eccles 1992). This model has been applied to organizations in order to convey an understanding of the connectivity and communication between its members, which cannot be captured by organization charts or formal role definitions. In the case of cooperative alliances, the term “network” can be used to depict a particular organizational form that is characterized by a high sense of mutual interest, active participation by all partners, and open communications.
In this latter sense, the network approach in (inter-) organizational theory provides valuable insights, especially when it is combined with those from other transactional perspectives such as TCE and resource dependence. This combination of perspectives illustrates how firms create and manage alliances among themselves as strategic responses to competitive uncertainties. The biotechnology industry provides a good example. Barley et al. (1992: 317) note that “the particular constraints and opportunities surrounding commercial biotechnology appear to have compelled organizations to form an elaborate web of formal alliances.” As a result, small firms have had to sacrifice some degree of autonomy in order to gain access to markets with high entry barriers. Powell et al. (1996) argue, with reference to the same industry, that its complex and expanding (p.59) knowledge base, with widely dispersed expertise, causes the locus of innovation to be found in networks of learning rather than in individual firms. The need for learning has, in other words, promoted cooperative strategies in this industry. Chapter 16 provides more detail on cooperative strategies in the biotechnology/pharmaceuticals sector.
3.6.3 Organizational learning
Given that many strategic alliances are established in order to secure advantages of learning and knowledge transfer, more attention is now being paid to how the organization of alliances can assist the organizational learning process (Inkpen 1995, 2002). Organizing alliances so as to reconcile their needs for learning and control is one of the most important requirements for a truly cooperative strategy to be implemented successfully. Alliances are clearly sources of external knowledge. Cooperation allows firms with complementary skills and knowledge to combine their knowledge bases into a stronger, more complete set of capabilities with which to compete in the marketplace (Madhok and Tallman 1998). In order to take advantage of cooperative opportunities, alliances need to develop superior routines for knowledge sharing (Dyer and Kale 2007). These routines are regular patterns of interaction that facilitate the transfer, recombination, and creation of knowledge for the allied firms together (Grant 1996). Rather than internalizing partner knowledge, cooperative ties allow the partner firms to access each other’s knowledge and build more effective resource combinations within the alliance. Important to these processes are the absorptive capacities of the partners for one another’s knowledge (Cohen and Levinthal 1990). For successful cooperation, good absorption requires some overlap in knowledge to provide mutual comprehension and understanding, but also clearly differentiated knowledge in order to add value through cooperation. Absorptive capacity also allows us to recognize the learning risks of alliances. Gary Hamel (1991) refers to “learning races” between partners in which the alliance principals seek to internalize their partner’s unique complementary knowledge through the alliance and to then terminate the alliance to avoid sharing the benefits of the integrated knowledge. Cooperation in building joint knowledge bases through alliances has clear benefits to both (or all) partners, but also has clear risks of losing proprietary interests in knowledge in the absence of strong controls in the form of clear contractual agreements, strong monitoring and enforcement mechanisms, and effective managerial governance.
One approach that has emerged in response to the learning challenge is a variant of what Peters and Waterman (1982) called “simultaneous tight–loose coupling.” The performance of the alliance is closely monitored in those operational areas agreed between the partners. This constitutes the zone of tight coupling, in which control predominates and learning is either incremental or is planned as with technology transfer. By contrast, the zone of loose coupling tends to be found in the areas of business development, marketing, human resource management, and external relations. (p.60) Here, the partners’ knowledge is less secure and/or less relevant, and potential “partner-related” complementarities need to be worked out as well. Learning is therefore at a premium, and it becomes appropriate to encourage flexible roles, local initiative, and an unfettered circulation of information. It is, clearly, not a straightforward matter to organize an alliance with different levels and types of coupling running together. It demands both a high degree of understanding from the partners and considerable skill on the part of the alliance’s chief executive (Schaan and Beamish 1988). Chapter 14 has a fuller discussion of learning and knowledge acquisition in and through alliances.
3.7 Stakeholder models and cooperation
The many frameworks and concepts that we have presented up to this point discuss cooperative strategies with the underlying assumption that the two or more partners involved in a cooperative venture seek cooperation as an alternative to the “normal” state of market competition, whether for customers, knowledge, rents, advantage, or some other measure of performance. Transaction cost models prescribe various, typically punitive, controls to limit opportunism. Resource-based models rely on superior economic benefit in an alliance to keep a partnership active. Game theory suggests that only when cooperation has superior reward value for each partner will this be the preferred choice. Learning theory suggests that learning has both rewards and risks, and so forth. So long as the partners in a cooperative venture are assumed to be maximizing their individual returns, then only extraordinary benefits from cooperation or extraordinary punishment for opportunism, for “defecting,” will keep them in line.
Stakeholder models offer an alternative view of cooperation. Stakeholder management anticipates competitive advantage when the firm is able to interact with all of its stakeholders on the basis of mutual trust and cooperation (Jones 1995). These stakeholders include stock and bond investors, employees, suppliers, customers, communities, and any other entities with commitments to the firm that are not immediately compensated. For instance, Japanese firms are said to outperform rivals because they use extensive outsourcing to suppliers, but do so in a culturally driven system of mutual obligation and trust in long-term relationships. Likewise, evidence suggests that firms which make long-term commitments to treat their employees as cooperative partners rather than as easily replaced assets tend to outperform their competition over time. Patterns of trust and voluntary cooperation reduce the risks of opportunism, benefit investment in resources with longer pay-off times, cut bargaining and monitoring costs, and generally improve efficiency while reducing managerial demands.
Stakeholder theory is cooperative at its core. Recognition that the needs of all stakeholders merit managerial consideration requires that all stakeholders, including equity investors, agree at least tacitly to cooperate with each other and with the firm. This model suggests that when firms seek cooperative solutions to joint needs, they become (p.61) stakeholders in each other’s organization and thus incur an interest in the success of their partners as well as themselves. Recognition of mutual benefit should reduce the likelihood of opportunistic or self-interested behavior and thereby reduce the expected transaction costs of forming an alliance. By encouraging mutual commitment, a stakeholder perspective should also encourage investment in transaction-specific resources such as specialized technology, cross-training, and personal ties that increase co-specialization and improve returns without emphasizing the risks of such commitments (Madhok and Tallman 1998). Cooperative strategies and the use of alliances become more attractive in this context than they might in a context of individual benefits and zero-sum relationships.
Stakeholder models are often contrasted with agency models, and as such have much to say about the ongoing ties between alliance partners. Purely rational models suggest that partner firms and alliance human resources who are seconded from the partners will always be looking for a chance to take advantage of the partnership by shirking, seeking to misappropriate intellectual property intended only for use within the alliance, or holding up the partner in search of a more advantageous arrangement. None of these activities encourage the levels of cooperation needed for the alliance to deliver on its promise of resource complementarities, shared activities, or other economic benefits. A stakeholder perspective, though, would predict that partners naturally tend to be cooperative and to avoid opportunistic behavior within an alliance, recognizing that they are mutual stakeholders in a common project and that mutual benefits will provide long range benefits to all sides. Consequently, the transactional costs of bargaining and enforcement mechanisms plus the failure of complementarity due to fear of misappropriation by the partner can be seen from a stakeholder perspective as vastly overstated and cooperative strategies and forms of organization as far more likely to be used than expected in more traditional models.
The key messages that emerge from this chapter are:
1. Strategic management theory:
• Emphasizes the need to be clear about the motives for adopting a cooperative strategy.
• The selection of a suitable partner is a key part of success.
• Both strategic fit and sensitivity to the need for cultural fit are key to alliance success.
2. Game theory provides valuable insights into the possible attitudes of one’s partner in cooperation:
3. Bargaining power models provide expectations for how the relative contributions of partners determine the structure and strategic direction of cooperative ventures.
4. Contract theory develops the idea that contracts are not necessarily substitutes for relationships in alliances, but that well-designed contracts can make possible improved inter-organizational and interpersonal ties in cooperative ventures.
5. Organization theory:
• In alliances, the dependency of one partner on the other for critical resources drives the relative influence of the partners on the strategy and structures of the venture.
• Alliances are a hybrid of hierarchies and networks and therefore have to develop their own special rules of organization.
• There is an inevitable tension between the control and learning motives of partners.
6. Stakeholder models of the firm are inherently cooperative perspectives on the role of the organization in society and promise to change the entire perspective on cooperative relationships between organizations and among their many stakeholders.
3.9 Questions for discussion
1. How can consistent success in partner selection be achieved?
2. What situation of competition versus cooperation between partners is most dangerous for the future of an alliance?
3. Is the extent that one partner has control in a joint venture likely to impact on that venture’s performance?
4. Is altruism necessary for an alliance to succeed, or is enlightened self-interest wiser?
5. Resource dependency and bargaining power models both suggest that the relative leverage of the partners on the formation process will have important implications for the operation and success of an alliance. How do power and dependency work to encourage and discourage cooperation?
6. Alliances offer many opportunities for learning from partners, but this can be either positive or negative for cooperation. How might organizational learning affect the prospects of an alliance?
7. How do shareholder and stakeholder models of the firm affect how we see cooperative ventures?
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