The Strength of Churning Ties: A Dynamic Theory of Interorganizational Relationships

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SERGIO G. LAZZARINI John M. Olin School of Business – Washington University 1 Brookings Drive, Campus Box 1133 St. Louis, MO 63130-4899 Phone: 314-935-4538; Fax: 935-6359 E-Mail: LAZZARINIS@olin.wustl.edu TODD R. ZENGER John M. Olin School of Business – Washington University 1 Brookings Drive, Campus Box 1133 St. Louis, MO 63130-4899 Phone: 314-935-6399; Fax: 935-6359 E-Mail: zenger@olin.wust.edu

June 2002

* We thank the insightful comments by Lyda Bigelow, Chih-Mao Hsieh, Gary Miller, and especially Jackson Nickerson, who provided critical suggestions to improve our argument. We also benefited from comments by anonymous referees of the Business Policy and Strategy Division of the 2002 Academy of Management Conference. Remaining errors and omissions are our own.

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The Strength of Churning Ties: A Dynamic Theory of Interorganizational Relationships
Abstract In many circumstances, firms seek to combine or balance the cooperation-based advantages of strong ties (partnerships) with the autonomy-based advantages of weak ties (arm’s-length exchanges) into a single relationship. However, we contend that such a combination is unstable, because tie strength is influenced by informal processes—socialization and learning—that are constantly shifting. Thus, managers cannot directly control the functionality of ties, but they can alter the trajectory of those informal processes through changes in formal mechanisms that periodically alter tie strength. Managers initiate weak ties and then strengthen them through formal mechanisms that promote cooperation, such as long-term contracts and joint ownership. Whenever ties become excessively strong and autonomy has been undermined, they are formally restructured or terminated. This generates ties that are neither permanently weak nor strong, but churning. We identify conditions that make churning ties an appropriate strategy to manage interorganizational relations, and also the costs and competencies of alternative formal mechanisms that managers can employ to reinforce and weaken ties.

Keywords Interorganizational collaboration, strategic alliances, networks, cooperative strategy.

The close buyer-supplier relations of Japan are often viewed as a benchmark in structuring interfirm alliances. Many argue that such partnerships promote mutual trust, knowledge sharing, and relationship-specific assets that enhance performance (e.g. Asanuma, 1989; Dyer & Nobeoka, 2000; Holmstrom & Roberts, 1998; Nishiguchi, 1994). Such partnerships, however, are far from a panacea. In 2001, Toyota, long viewed as possessing model types of supplier relationships, discovered it was paying significantly higher prices for parts inside its close network of suppliers than were available outside this network. Predictably, they encouraged their managers to “seek business ties outside the group” (Dawson, 2001: 43). Chrysler, which actively sought to replicate “Japanese-style” partnerships in the U.S. (Dyer, 1996), faced a similar problem in 2001, with supplier relationships “so cozy” that competitors were extracting better prices for similar parts (Ball, 2001: A8). Moreover, efforts by automakers to push component purchasing into electronically-managed markets suggests movement away from close ties, toward more arm’s-length supply relationships (Lucking-Reiley & Spulber, 2001). The above events reflect a fundamental tradeoff that managers face in crafting their interorganizational relations. While a long-term exchange promotes cooperation, which is often referred to in the literature as a “strong” tie, an arm’s-length exchange or “ weak” tie is easily severed and thus enables access to new relationships that may yield cost reduction or innovation. If we view tie strength as a choice, how then do firms select an appropriate tie strength for their interorganizational relations? Most authors adopt a simple contingency argument: the choice of tie strength depends on the attributes of the exchange or the industry in which it occurs. Thus, while exchanges involving relationship-specific assets require the support of strong ties, simple exchanges that do not require specialized assets can be managed through a series of weak ties, i.e., arm’s-length relations with multiple firms (e.g. Dyer, Cho, & Wujin, 1998; Williamson, 1985). However, very often managers seek both cooperation and autonomy in crafting a particular exchange relation. For instance, an exchange involving relationship-specific investments within an industry with high technological uncertainty may benefit not only from a strong tie, but also 4

g. We posit. In many circumstances. Thus. managers seek to both promote cooperation in the form of relationshipspecific investments and at the same time maintain autonomy to access alternative partners. For instance. they discourage relationship-specific investments and other forms of cooperation. Harrigan. 2000). On the other hand. but low cooperation. however. This existing tie then becomes weak. 1988a. 2000). 5 . however. An opposite path of change is also possible: a firm with a strong tie supporting a particular exchange may initiate a new tie with another exchange partner and in the process unravel its existing strong tie. Rowley. which begins as an arm’s-length tie. showing high cooperation. except indirectly by the rather blunt instruments associated with formal changes in the nature of the exchange. showing high autonomy. the degree of tie strength that develops over time has an uncertain component that can lead to greater or lesser tie strength than originally desired by managers. that managers cannot craft interorganizational ties that combine the autonomy of weak ties with the cooperation of strong ties in any stable manner.from a series of weak ties (e. nor directly controllable by the managers. Strong ties. Over time idiosyncratic routines and social attachments will tend to emerge and eventually constrain flexibility to access new knowledge and new exchange partners. In other words. may evolve through repeated interaction into a strong tie. but in the process managers may socially obligate themselves to partners whose capabilities become obsolete as potential new partners with lower costs or better technologies emerge (Afuah. The tie then becomes excessive in strength. foster investments in relationship-specific assets. Weak ties provide incentives for exchange partners to remain on the cutting edge in terms of cost and innovation and provide the flexibility to easily sever ties when opportunities emerge. while weak ties maintain the managers’ flexibility to pursue new opportunities and acquire new knowledge. but low autonomy. The basic problem is that informal processes influence tie strength and these informal processes are neither static. managers would like to maintain an intermediate level of tie strength that balances cooperation and autonomy. an exchange relationship. & Krackhardt. Behrens.

managers monitor the evolution of informal processes that alter tie strength and implement. Thus. managers terminate this long-term relationship or alter its formal structure in ways that reverse the trajectory of tie strengthening. may actually be the only way in which managers can approach an “ideal” tie when the achievement of superior performance requires both cooperation and autonomy. By providing a dynamic theory of how firms adjust the governance of ties as a response to changes in interorganizational 6 . when repeated interaction in a strong tie damages autonomy. Thus. we argue that managers can only dynamically approach the desired tie strength by essentially vacillating between formal mechanisms that alter expectations of relationship continuity. However. the newly formed tie is strengthened over time with the aid of formal governance structures such as long-term contracts and joint ownership. We submit that such patterns of escalating and weakening ties. Cho et al. thereby providing incentives to shape the direction by which tie strength increases or decreases. Since informal processes that influence tie strength are not directly controllable. Namely. because managers have no capacity to statically choose the informal processes that influence the performance of interorganizational relations. building upon Nickerson and Zenger (forthcoming). ex post. they simply build new relationships. formal changes to adjust strength to the desired level.. We identify conditions that make churning ties an appropriate strategy to manage interorganizational relations. and also the costs and competencies of alternative formal mechanisms that managers can employ to reinforce and weaken ties. While initially weak. such changes are costly: managers will resist adopting formal changes until the benefit of adjusting tie strength exceeds the costs of doing so. it is likely that at some point in time the degree of misalignment between desired and actual strength will be sufficiently severe to afford the cost of changing formal governance. If managers sever the tie. the achievement of superior interorganizational performance may require ties that are neither permanently strong nor weak.We contend that a static theory of tie strength is misguided. Rather. but churning: managers may need to promote periodic changes in formal mechanisms that constantly alter the path of informal processes influencing tie strength. considered by some as dysfunctional (Dyer. 1998: 73).

Levinthal. & Fichman. the emotional intensity. though we recognize that a strong tie may emerge for reasons other than the functional support of an exchange. Nohria.e. or information. 1978. the degree to which they expect to continue their relationship despite the existence of alternative partners (Blau. Gulati. to facilitate exposition. Notice therefore that our unit of analysis is a dyadic 1 This definition also allows a direct application of the concept to interorganizational ties. i. 1992). since some elements present in Granovetter’s (1973) original definition. we then briefly discuss how a similar logic applies to multiple transactions in networks. We next present the logic of churning ties and the formal instruments available to firms to weaken or reinforce ties. 1998. as the relationship unfolds.g. Thus. we simplify the original definition of tie strength by considering a variable that mediates most processes supporting close relationships: the “commitment” of partners. The paper is structured as follows. Dyer & Singh. Zajac & Olsen.. and the reciprocal services which characterize the tie.1 We view tie strength as a governance device. We therefore define tie strength as the degree of commitment that supports an exchange relationship for the transfer of goods. & Zaheer. 1995a. services. we review the literature relating tie strength to performance. Ring & Van de Ven. and then discuss in detail the difficulty in managing ties when industry or exchange contingencies demand at the same time cooperation and autonomy.” This collection of complex social elements that characterize close relationships tends to be associated with patterns of interaction that deliver a long time horizon of expected exchange which. creates a long history of past exchange (e. Gulati. TIE STRENGTH AND PERFORMANCE Granovetter (1973: 1361) originally defined tie strength as a “combination of the amount of time. 1964. 7 . In the next section. such as emotional intensity and intimacy.g. Seabright. we contribute to the growing body of research examining the performance implications of external relationships (e.performance. Kollock. the intimacy (mutual confiding). 2000). Since our main focus is on dyadic transactions. 1994. are more applicable to interpersonal relations. Concluding remarks follow. Cook & Emerson. 1994. 1993).

repeated interaction and familiarity also create a “shadow of the past” which promotes the emergence of relational governance based on social attachments. Zajac et al. Williamson. Luhmann. Foss. exchange is occasional and thus the likelihood that parties will be able to meet in the future is negligible. Thus. On the one hand. 1980. parties oftentimes continue their relationship in subsequent projects (e. ex post. strong social attachments reduce conflicts and promote cohesion (Krackhardt. 1997. Axelrod.. 1985). & Zanfei. 1992. Poppo & Zenger. 1993). Within this perspective.g. Heide & Miner. most exchanges of this sort actually involve a series of project collaborations. 1984. 1989). However. social attachments are. 8 . we next discuss the performance consequences of tie strength. Benefits of Strong Ties The primary benefit of a strong tie is that it provides the necessary commitment to promote cooperation in an exchange. 1985). Holmstrom et al. many authors note that one of the main advantages of commitment is that it encourages ex ante investments in relationship-specific assets (Dyer & Singh.2 Based on this definition.. Parkhe. 1985: 72-73). 1997: 312) between individuals representing each firm. On the other hand. 1995a. However. Faulkner. human-specific assets or co-specialized knowledge generated from joint learning (Bureth. 1991. informal relationships between firms can arise due to “closely interwoven personal relations” (Inkpen & Currall. Consider the movie industry: although the production of a movie has a finite horizon. Larson. meaning that the long-term payoff from cooperation surpasses the short-term payoff from defection (Anderson & Weitz. Ring et al. Helper. 1998). At first glance. 1996. Williamson. commitment provides a “shadow of the future” to discourage opportunism. 1992). that a party will leave the relationship or attempt to renegotiate contractual terms in such a way that the other party will be disfavored. 2 This rules out one-shot transactions such as when a firm acquires standard machinery (Williamson. 1992. McEvily. Parties engaged in arm’s-length exchanges are less willing to invest in such assets since there is a risk. between people rather than firms (Seabright et al. project collaborations with finite duration may appear to fall into this category. 1998. 1993). 1998. In such cases. trust. Nelson. 1994. perhaps more importantly. 1979. 3 To be sure..exchange that is potentially (although not necessarily) recurring. and norms (Gulati. Outcomes of repeated interaction between these individuals are likely to disseminate to other members of the partnering firms and generate collective expectations and norms (Zaheer.. 1998. Wolff. Hennart. 1992. Relationship-specific assets include not only physical investments but. in their essence. & Perrone. 1988. Macneil. 1998. 1992.3 This further reinforces the cooperation-based benefits of strong ties. Madhok & Tallman. 1983).

1992).. The firm can flexibly exchange with a variety of firms which possess specialized knowledge and capabilities (Granovetter. 1979. 2000. 1996. thus increasing firms’ willingness to continue their cooperative exchange (Ring et al. thus diminishing its value (Dussauge. Bradach & Eccles. Liebeskind et al. Seabright et al. The same mechanisms that promote commitment also restrict firms’ capacity to access new knowledge. 1997. since repeated interaction implies increasing amounts of time and effort devoted to the relationship (Madhok et al. that personal interaction and norms enhance joint learning and knowledge sharing between firms (Dutton & Starbuck. goods. Weak ties also circumvent the dysfunctional outcomes unleashed by the escalating commitment of strong ties.. Continuous interaction with the same partners restricts firms’ exposure to new ideas and information (Adler & Kwon.. 1996) and undermines the diversity of knowledge available in the alliance. for instance. 1995. Rulke. the absence of a strong tie is what frees the manager to access knowledge. Dyer et al. 1999). Uzzi. & Anderson. Singh. Schilling & Steensma. Oliver. Richardson. Zucker.. In addition. 1996). they can adjust or sever their existing ties to benefit from new external opportunities. 1973). Kale. Dickhaut. & McCabe. 2000. Since agents connected through weak ties are not committed. 2000. 2000. or services through a wide range of weaker ties. 1998). Dore. joint learning and knowledge sharing that occurs between two firms can lock 9 . Liebeskind. Managers can flexibly shift to access new knowledge and valuable exchange opportunities with alternative firms (Granovetter.. Interfirm specialization creates diversity of knowledge and competencies in a network (Kogut. Greif. Shaver. Zaheer. 2000). Thus. 1991. Hamel. Indeed. & Brewer. 1983). & Mitchell. psychological commitments towards particular partners will tend to escalate. 1994. Empirical research has found. & Perlmutter.Relational norms such as reciprocity also curb firms’ willingness to defect and thus support mutual trust (Berg. Benefits of Weak Ties Weak ties are advantageous because they provide autonomy. Garrette. Nakamura. 2001). 1996. 1982. 1989. 2002. 1972) and enhances opportunities for innovation through knowledge spillovers among firms (Feldman & Audretsch. & Yeung.

1992. Yamagishi et al. 1982.S. 1993). which limit firms’ ability to interpret external sources of information and recognize the importance of those sources (Katz. Poppo et al... 2000. 1996. Excessive socialization may undermine partners’ ability to find discrepant information and innovative solutions (Gruenfeld. 2000. Williams. 1980. lower quality and slower delivery times. The strong social attachment that accompanies repeated interaction aggravates the problem of gaining access to new knowledge. 1989). Yamagishi. Kollock.. Additionally. Absent the need for relationship-specific assets.. Halpern. Kern. automakers expressed “concerns that interpersonal relationships could lead buyers to award contracts to suppliers who had higher unit costs. 1998. 1995. Constrained by such obligations. partners will tend to favor the stability of their relationship over efficiency (Dore. this becomes a liability if partners are trapped into the “wrong” knowledge (Afuah. 1998).. Kern. even if strong ties promote knowledge sharing and co-specialization (Dyer et al. For instance. if pursuing these opportunities threatens existing ties or violates existing social obligations (Gargiulo & Benassi. 1983. the weaker ties of market-like exchanges may provide sufficient governance (Williamson. Seabright et al. Kale et al. Young-Ybarra & Wiersema. Cook. Mannix. 2000). Thus. 1999).” Contingency Arguments The simple recognition that strong ties support cooperation. 1998) and organizational economists 10 . & Watabe. 1998. firms connected through strong ties may be unwilling to pursue better opportunities. 1993. & Neale. 1994. Humphrey and Ashforth (2000: 719) document that U. Social exchange theorists (Cook et al. 1998). Thus. 1978. 1990. 2000. transaction cost economics posits that relationship-specific assets at a minimum require the support of long-term arrangements to reduce the hazards of opportunistic behavior. Levinthal & March. 1994. Jeffries & Reed. Routines emerging from repeated interaction tend to create idiosyncratic language and procedures.them into one particular field of knowledge and lock them out of external opportunities (Cohen & Levinthal. while weak ties provide autonomy suggests a simple contingency argument in which tie strength is matched to exchange conditions. 2000). Leonard-Barton. 1985). Zenger & Lawrence.. Tushman & Katz. Grabher.

Hesterly. 1981. Jones. such as volatile demand. managers commonly face a set of conditions that mandate a conflicting pattern of tie 11 . <Table 1 around here> WHAT IF FIRMS WANT TO COMBINE THE ADVANTAGES OF BOTH WEAK AND STRONG TIES? While these contingency arguments adequately describe the relationship between tie strength and various exchange or industry conditions. More difficult measurement of exchange performance requires longer-term relations to discourage opportunism. von Hippel. Schilling et al. 1991). Other scholars view the transfer of tacit. March. 1999. 1997.(Barzel. according to the contingency arguments discussed above. Kogut. two factors plague managers’ choice of tie strength.. which call for exploitation (see also Harrigan. 1998. Drawing from the concepts of exploration. whereas the cooperationenhancing properties of strong ties deliver superior performance in stable industries. and exploitation. They argue that the autonomybased benefits of weak ties are crucial to enhance a firm’s innovativeness in industries with high technological uncertainty. the use of existing resources (Koza & Lewin. 1988. 1994). 1982. Still other theories propose a fit between tie strength and industry conditions. complex knowledge as an exchange requiring strong social ties and the transfer of codified knowledge as well suited to weak ties (Hansen. First. Table 1 summarizes the fit or alignment between exchange/industry conditions and tie strength. & Borgatti. (2000) propose a fit between tie strength and industry characteristics. 2000). Kranton & Minehart. which demand exploration-oriented tasks. Levinthal et al.. 1994) highlight additionally the role of measurement difficulty in the choice of governance. Some authors also emphasize the role of market-level uncertainty. 1993. Holmstrom & Milgrom. favoring transactions with many firms to absorb temporary supply or demand shocks (Eccles. 1988a. the search for new resources. Rowley et al. Hennart. 1988. 2001).

1988). 1994. & Smith-Doerr. Young-Ybarra et al. Finally. 1996. Recognition of this tension between weak and strong ties pervades the literature. 1991.strength. & Hunt. 1991. 2000. We consider these issues next. 1991. Oliver. Spekman. high technology environments. Consider the case of crafting R&D alliances in uncertain. firms will want both cooperation and autonomy in a single relationship. they will want a tie to be strong enough to create commitment while at the same time weak enough to enable access to a range of alternative firms. Hamel. 1978). Powell. 1991. Such conditions require the support of strong ties (Table 1). Pfeffer & Salancik. 1989) and transfer of tacit knowledge (Hennart. 1999). Such continuous exploration calls for the autonomy of weak ties. Lambe. Park & Russo. 1996). 1997. Blau (1964) points out that while social attachments increase cooperation. managers cannot directly choose or control informal processes that influence tie strength. This dilemma is also present in the literature on partnerships and strategic alliances. Parkhe. In such settings. Kogut. Geringer & Hebert. 2000. 1988. At the same time. Thus. managers want the benefits of both weak and strong ties. Pisano.. firms require continuous access to novel knowledge (Hagedoorn & Schakenraad. they also recognize that such longevity reduces partners’ flexibility to learn and benefit from other firms (Afuah. even though they are commonly faced with commitments to existing relationships (Galaskiewicz. in this context. Singh & Mitchell. Second.g. Conflicting Contingencies In many settings. Eccles and Crane (1988: 55) in their study of investment banking find that banks and their customers often “want the advantages of [long-term] relationships and the advantages of a more transactional [arm’s-length] orientation” (emphasis in the original). While scholars generally view alliance longevity as a proxy for performance (e. 1985. creating effective R&D alliances often requires significant investments in relationship-specific human assets (Oxley. Resource-dependence theory posits that organizations desire autonomy to allocate their resources. Koput. 1996). they restrict individuals’ mobility to pursue opportunities with alternative partners. Doz and Hamel 12 .

4 Or. that such a combination is unstable: it is not possible to structure relationships that permanently combine cooperation and autonomy. consider a service relationship that requires both a high degree of customization and enough flexibility to explore opportunities brought by alternative service providers. If the change is radical enough to suppliers. managers will seek an intermediate level of tie strength that balances the cooperation-based advantages of strong ties with the autonomy-based advantages of weak ties. a buyer-supplier relationship that involves high asset specificity. but is also subject to disruptive technological change that may cause the competencies of incumbent suppliers to become obsolete. in doing this. Afuah (2000: 389) asserts that in the advent of technological change “staying with the old supplier means that the manufacturer can build on existing close relationships but must grapple with the problems that the supplier faces in making the transition to the new technology. however.(1998: 21) conclude that while committed relationships facilitate cooperation. Unfortunately. by establishing a strong tie. which is properly carried out through weak ties (Zaheer & Zaheer. for instance. The Dynamics of Tie Strength The fundamental difficulty facing the firm is that tie strength is largely influenced by informal processes—processes that managers can only indirectly control. Eccles and Crane (1988) find that both customers and investment banks would like to develop strong ties to support cooperation.” 5 In their study of investment banking. banks and their customers necessarily reduce their autonomy to make better deals with other firms. However. firms have no capacity to structure a permanent relationship that is at once flexible.” The tension between weak and strong ties exists whenever an exchange is subject to conflicting contingencies. thereby supporting cooperation. Financial transactions require continuous exploration of arbitrage opportunities. Indeed. a firm may be handicapped by the organizational procedures and routines that it developed in its old relationships. 13 . investment banks would like to increase the amount of information sharing in their relationship. “companies must be free to pursue better opportunities when they appear. 4 Analyzing the microprocessor industry. and also sufficiently committed. tie strength is constantly changing as personnel within the two firms both jointly learn and socialize. Consider. While corporate customers would like banks to offer services tailored to their needs. 1997). Through repeated interaction personnel within the firms develop idiosyncratic routines and co-specialized knowledge. thereby easy to exit and providing easy access to new information.5 In the presence of such conflicting contingencies. as well as relational governance due to emerging social norms and attachments. they many not be able to supply components with the type of quality that the firm needs to be competitive with the new technology… [However] switching suppliers means having to build new relationships and. We argue below.

1991). 1995). As Brown and Duguid (1998: 100) remark.These informal processes cannot be directly controlled or contracted for ex ante for two main reasons. at the outset. Therefore. Wegner. 2000. individuals within firms 14 . but they will be undermined if changes in industry conditions or firm-level strategies shift individuals’ attention to activities other than those involved in the alliance. it is “socially embedded knowledge that ‘sticks. joint learning and socialization will be reinforced over time if for some reason individuals within the firms become motivated to proceed with an ongoing project. ex ante. Arrow. 1999. and procedures (Kogut & Zander. it tends to be socially embedded and supported by idiosyncratic routines (Argote. In addition. Due to the difficulty in adjusting informal processes that influence tie strength. when knowledge is jointly generated. they involve complex. the outcome of such processes is affected by stochastic factors that boundedly rational managers cannot perfectly foresee before firms interact in a given period. For instance. Suppose that individuals within partnering firms jointly learn. but also the accompanying social connections influence individuals’ choice and solution of problems (Argote. but also shared norms. Levine & Moreland. ties tend to become either very strong—with high cooperation but low autonomy—or very weak—with high autonomy but low cooperation. 1980.. Since joint learning requires social interaction. how to develop certain processes or technologies that are judged to be promising. appropriate choices to avoid events that may alter the path of joint learning and socialization. 1989). it delivers not only co-specialized knowledge. Tushman et al.” This makes it difficult for outsiders to interpret that collective knowledge. complexity and unforeseen changes will make it difficult for managers to make.. intertwined social cognitive mechanisms: not only is learning a process resulting from collective efforts. Cohen et al. 1991. Consider the first possibility: ties becoming increasingly strong. 1993).. 1999. Thus. 1974. Over time. as well as for insiders to interpret external knowledge embedded in other social contexts (Afuah.’ because it is deeply rooted in practice. Levinthal et al. First. Leonard-Barton. Zenger et al. Erber. & Raymond. 1990.. 1996. ties that initially exhibit intermediate levels of strength tend to be altered in a self-reinforcing manner. values. Second.

Both institutional and personal trust relations evolve..may become less receptive to new perspectives and more willing to deal only with people showing similar interests and views (Gargiulo et al.” Notice that Williamson (1985: 62) does not restrict the occurrence of this phenomenon to exchanges requiring specific investments at the outset. the tie will tend to become weak. He also considers exchanges where asset specificity deepens as a by-product of repeated interaction. 2000. Nelson. Individuals within the firms may therefore devote diverging effort towards new projects instead of projects where firms’ interests align. Consequently. Familiarity here permits communication economies to be realized: Specialized language develops as experience accumulates and nuances are signaled and received in a sensitive way. 1982. The processes generating such change are in theory symmetrical to the processes described above. 1999. Consequently. If firms are to some extent autonomous. due to socialization and joint learning. though in practice tie strength may be more quickly unraveled than enhanced. implies that it will be increasingly less costly to exit the relationship. Thus the individuals who are responsible for adapting the interfaces have a personal as well as an organizational stake in what transpires. Katz. they will be able to use alternative firms for a particular exchange or pursue new types of activities that may emerge as a result of external events such as changing industry conditions. but low autonomy. the relative significance of 15 . The resulting increase in commitment will tend to further solidify social attachments and deepen co-specialization (Bureth et al. 1989). 7 Eccles and Crane (1988) find this process of tie weakening in their study of investment banking. But then firms will become increasingly reluctant to continue sharing knowledge and co-specializing assets.6 An opposite path of change is also possible: ties can weaken over time. a profound change takes place in the expectations each has about the future… Because a relationship is based on both transactions and the expectation of future transactions. in turn.7 6 This process of tie strengthening is consistent with what Williamson (1985) calls the “fundamental transformation. 1997). individuals will tend to downplay opportunities with new firms and favor firms with which they have developed relationships. They note that “… when the customer can choose from among a group of investment banks. The resulting decrease in interfirm interaction reduces co-specialization and social attachments which. uncertainty about the future diminishes the quality of the relationship… The customer’s unwillingness to share information with the investment bank beyond what is necessary to do a particular deal further diminishes the quality of the relationship. Hansen.. When interaction between deals decreases. showing high autonomy but low cooperation. The relationship may therefore reach a status of excessive tie strength associated with a pattern of functionality involving high cooperation.” According to Williamson (1985: 62) the initiation of a relationship triggers a process where “additional transaction-specific savings can accrue at the interface between supplier and buyer as contracts are successively adapted to unfolding events and as periodic contract renewal agreements are reached. as they perceive an increased risk that their partners will pursue opportunities with alternative firms.

since partners will wish an intermediate level of tie strength that balances cooperation and autonomy and such combination is unstable. or weak. The fundamental question is therefore how to increase relationship performance under those conditions. strong tie dilemma statically. since there will be forces pulling the relationship towards either extreme. Doz (1996) discusses the role of stochastic “initial conditions” that influence future alliance outcomes. 8 For instance.. further reinforcing the perception of an increased transactional [arms’s-length] orientation on the part of the customer” (Eccles et al.. for instance. In sum. such as point X. due to the forces described above. However. In the presence of conflicting contingencies.e. while managers can in theory identify an ideal tie strength for a given exchange relationship. any tie close to point X will gradually become either strong. showing high autonomy but low cooperation—i. either a strong or a weak tie permanently—we contend that firms can do better in the presence of conflicting contingencies by promoting dynamic adjustments in tie strength in order to reap temporarily the benefits from autonomy and cooperation. points S or W) is sub-optimal for firms that would like to procure.. transactions decreases. the process of tie change will be path dependent (Arthur. 16 .Figure 1 illustrates the changes described above. The permanent use of either a strong tie or a series of weak ties (i. firms’ preferences increase Northeast: they would like to reach a position with high levels of cooperation and autonomy. <Figure 1 around here> The arguments above suggest that firms cannot cope with the weak vs. 1988: 58. Which outcome will be eventually “selected” is uncertain at the outset. Rather than pursuing stable but sub-optimal outcomes—i.. showing high cooperation but low autonomy (point S). 1989): a host of stochastic factors outside our model will eventually decide to which particular point the relationship will tend to converge. such tie strength cannot be maintained in the presence of conflicting contingencies.e.e. the relationship will move towards either point S or W.8 Thus. customized products in industries with uncertain technological paths. emphasis in the original).

For instance. To be sure. intermediate levels of tie strength that balance cooperation and autonomy are difficult to sustain. First. and (3) the capacity to alter these dynamics through formal mechanisms lead to the conclusion that exchange performance is optimized not by static matching of tie strength to exchange or industry conditions. Changes in formal governance essentially alter expectations of relationship continuity. 17 .” we mean individuals who constantly monitor and attempt to increase the performance of an exchange. The repeated interaction that is thereby encouraged tends to promote socialization and joint learning. there is a wide range of circumstances under which both cooperation and autonomy in an exchange relationship are desired. the above assumptions of (1) conflicting contingencies. because informal processes that influence tie strength are dynamically changing. through formal changes. when an exchange relationship is weak. given that informal processes are to a large extent uncontrollable. We provide more comments on this issue in the conclusion section. which heighten expectations of relationship continuity and hence increase commitment.CHURNING TIES: DYNAMICALLY ADJUSTING TIE STRENGTH The preceding discussion provides us with two assumptions about the nature of interorganizational relationships. managers can indirectly influence their trajectory through periodic. But although it is not possible to directly control such informal processes directly. thereby providing incentives to change the direction by which tie strength increases or decreases. Second. they will not be willing to promote any kind of change anyhow. Thus. whenever tie strength migrates in either direction significantly beyond the desired level. changes elicited by formal governance will at best set the trajectory by which such informal processes are likely to evolve. if managers are deeply involved in the informal processes of socialization and cospecialization. but rather by dynamic management of tie strength. Firms initiate weak ties and then strengthen them through formal mechanisms that promote 9 By “managers.9 Building upon Nickerson and Zenger (forthcoming). (2) dynamically changing tie strength due to informal processes that are not directly controllable. However. managers can lengthen the terms of a contract or develop a joint equity relationship. marked changes in formal governance mechanisms. the role of managers is to constantly monitor the performance of an exchange and intervene.

The Logic of Churning Ties Churning ties involve periodic changes in formal governance that alter the path of informal processes influencing tie strength. where it attains maximum performance.. managers adopt again formal changes to increase commitment. they can shorten the contractual duration. For instance. which in turn favors knowledge sharing and the formation of shared norms. whenever ties become weak. such as long-term contracts and joint ownership.g. Such changes. The relationship will thus tend to move towards point S.commitment and hence create incentives for socialization and joint learning. Then. close to point W) and a stronger tie is desired. As a result of increased commitment. More drastically. added to the dysfunctional effects of socialization—e. However. Whenever ties become strong and autonomy has been undermined. If formal changes are successful. Through this pattern of churning ties the firm dynamically achieves levels of tie strength more closely aligned with the desired level than could be achieved by simply allowing a tie to continuously strengthen or weaken over time.. Cooperation in the form of knowledge sharing will coexist with the ability of firms to learn from one another. values. they can sever the tie. as well as from other firms. Unfortunately. and routines. the lack of experience and 18 . When the relationship is extremely weak (i.e. informal processes that influence tie strength will continuously shift. which enhance expectations of relationship continuity. managers can extend the duration of a contract or contractually specify shared asset investments. both parties must craft new relationships. Please refer to Figure 2. they are formally restructured or terminated. Limited ability to interpret and acquire new knowledge. friendship ties inducing favoritism—will cause a sharp reduction in performance. managers can pursue formal changes that promote commitment. since they will tend to carry distinct experiences and knowledge sets. managers can do the reverse: they can formally reorganize the terms of their exchange. then the relationship will reach a point like X′ . To avoid having the relationship reach point S. encourage repeated interaction. If either firm severs the tie. co-specialization and social attachments will likely escalate. For instance. where cooperation will increase at the expense of reduced autonomy.

this occurs if increases in cooperation or autonomy have decreasing marginal effects on performance. By contrast. whereas costs to weaken ties may encompass the costs of severing relationships. <Figure 2 around here> However. churning ties by continually stimulating. Thus. formal changes designed to adjust tie strength are costly. movement towards point S will bring cooperation gains that will tend to outweigh initial losses in autonomy. when a tie is weak (low cooperation. Thus. low autonomy). it can at least temporarily achieve balanced levels of cooperation and autonomy that accompany intermediate levels of tie strength. when the relationship is. when. further increases in cooperation have little impact on performance compared to even small increases in autonomy. We note that the trajectory depicted in Figure 2 is only illustrative: other paths may be described and may also enhance performance. managers must again employ formal changes to increase commitment. they have differential ability to promote either strengthening or weakening—i. while intermediate tie strength cannot be achieved statically. then diminishing tie strength may deliver higher performance than can be achieved by either a string of short-term exchanges or by one extended strong tie. it can be achieved dynamically by using formal mechanisms to periodically increase and decrease tie strength.familiarity with their new partners will be an impediment to promoting investments in relationship-specific assets and knowledge sharing. high autonomy). at point W. First. For instance. when a tie is strong (high cooperation. Due to these costs. a firm decreases autonomy at a much higher rate than it promotes cooperation). small increases in cooperation contribute much more to performance than further increases in autonomy.10 The formal mechanisms available for the implementation of churning ties differ in two ways. Therefore. Were change costless. decisions to shift tie strength closer to the desired level must be balanced against the costs of change.. exhibiting high autonomy but low cooperation. by strengthening a tie. costs to strengthen ties may encompass expenses to craft devices such as long-term contracts. such as point X′ . Thus. managers will need to wait until the benefits of adjusting tie strength exceed the costs of the necessary formal changes. To restore cooperation.e. the new or existing tie will be close to point W. Thus. say. as long as they are not strongly “convex” (e. 19 . In other words. Although this pattern of strengthening and weakening ties cannot achieve the “ideal” point X. managers would simply churn the ties at small deviations from the desired level of autonomy or cooperation. formal 10 Rigorously speaking.g. including the associated legal costs to alter clauses or settle disputes..

mechanisms vary in terms of the likelihood that they will alter the trajectory of informal processes influencing tie strength. In addition. Basically. is centered on the effects of contractual incentives or punishments. Sitkin & Roth. formal changes that more likely promote commitment at the outset tend to accelerate the process of socialization and joint learning. and also in their associated costs: loose contractual arrangements. create incentives for the development of social attachments. Macaulay. co-specialization and routines (Zenger. Second. forthcoming) or undermine (Fehr & Gächter. To disrupt this self-reinforcing process. Gibbons. Loose contractual arrangements serve to signal intentions for future collaborative ventures.. Firms are not likely to develop shared routines and co11 There is a debate on whether formal mechanisms promote (Baker. Renewable short-term contracts and narrow agreements based on particular projects to test the competencies of possible partners are examples. consequently. managers must adopt formal mechanisms that credibly commit firms to a repeated interaction and. This discussion. long-term contracts. 1994. & Murphy. engaged in a recurring exchange. forthcoming). emphasizing their relative costs and competencies. and the resulting pace of change.11 We discuss below three possible changes in formal governance. which must be factored in the decision to implement churning ties. lack of commitment inhibits cooperation. We next discuss in detail the formal instruments that can be used to reinforce and weaken ties. the process of contracting itself creates opportunities for social interaction (Poppo & Zenger. to some extent. Our argument that long-term contracts promote tie strengthening is actually simpler: such instruments guarantee that parties will be. since crafting contracts and other formal devices requires parties to jointly determine procedures to deal with unexpected changes. such formal mechanisms are associated with distinct levels of implementation and downstream costs. Strengthening Weak Ties When ties are weak. and joint ownership. 1993) relational governance. 2002). managers must create expectations that the relationship will endure. 2000. Even though such loose agreements are not too costly to implement and their termination is relatively easy. they do not create enough commitment to strengthen ties. and lack of past cooperation induces low willingness to commit. Lazzarini. however. 20 . arranged increasingly in their ability to create expectations of relationship continuity. & Poppo. For instance. Poppo et al. 1963: 64.

such as mutual investments in idiosyncratic assets and joint equity stakes in common organizations (e.specialized knowledge merely with a short-term contract. However. 1998. joint ventures). Williamson. 1997. they also tend to increase 21 . Nonetheless. Second. 1999). in some cases.. 1988a). 1998). 1985.g. While such formal changes more likely achieve high cooperation levels. implementation and downstream costs increase. Young-Ybarra et al. 1991. 1988). 1992. Joint ownership involves not only high implementation costs related to up front investments.. Thus. Thus. but also high downstream costs since part of such investments may be sunk in the form of dedicated assets and organizational structures (Doz et al. Joskow. The degree of commitment enabled by long-term contracts is stronger than in the case of loose contractual agreements since the former explicitly defines the extent of repeated interaction. Harrigan. they are not very effective at altering the trajectory of the relationship towards strengthening. The anticipation of future events and the establishment of procedures to respond to such events engender major challenges for the implementation of long-term contractual relations (Crocker & Masten. Finally. Weiss & Kurland. Long-term contracts take a step further by formally bonding parties in a recurring relationship or restricting exchange with alternative firms. they are more costly as well. such as in the case of exclusivity agreements.. it is necessary to incur substantial legal expenses and. although loose contractual agreements are not costly. they tend to have high implementation costs and high downstream costs to restore autonomy whenever necessary. Furthermore. they have two side effects. long-term contracts induce downstream costs to alter or terminate them when necessary. it is precisely these high downstream costs that make exit costly and thus strongly promote commitment (Anderson et al.. managers can strongly commit by making use of joint ownership. To exit from a contractual obligation. accomplish side monetary transfers to compensate for losses faced by the other party (Argyres & Liebeskind. First. although long-term contracts are better able to strengthen the tie than loose agreements. Notice that changes in formal governance that are more likely to strengthen the tie are a double-edged sword.

Managers can renegotiate the terms of the exchange through the reallocation of ownership stakes (Blodgett. bilaterally negotiated termination. which in turn further escalates commitment. buyer representatives can be “rotated” within a firm in order to avoid dysfunctional friendship ties with seller representatives inducing favoritism and biased pricing (Jeffries et al. We discuss the following formal changes. by which we mean formal changes in the structure of interaction between firms. which should be interpreted as an increase. and unilateral termination of the partnership. 2000). We do not discuss this possibility here since. Reuer. & Singh. managers can pursue tie weakening through a host of changes in formal governance aimed at restoring autonomy by altering the trajectory of socialization and cospecialization. 22 . For instance.S. Kogut. auto industry (Humphrey et al. Thus. rather than a decrease. Weakening Strong Ties Ties can also be excessive in their strength leading to a self-reinforcing process where high commitment reduces firms’ autonomy. 1989. Dussauge et al. for simplicity. Such rotation practices have been evidenced in the U.12 The least aggressive mechanism for weakening ties involves reorganization of the formal governance. meaning that the relationship will likely display intermediate levels of tie strength for too little time (using Figure 2. They can also adjust contractual clauses and modify monitoring procedures (Reuer. 2000: 719). To avoid this outcome. in tie strength. when managers reallocate assets without 12 By “termination” we mean the dissolution of the long-term relationship. 1992).. Notice that alliances can terminate by merger or acquisition (e. 2001). Zollo.. To reduce the problem of socialization. arranged in an increasing order in terms of their ability to promote tie weakening and also their costs: reorganization of formal governance.the pace of tie strengthening. formal changes that more likely promote cooperation at the outset also increase the likelihood that the relationship will quickly achieve excessive commitment levels associated with low autonomy. where parties will become more autonomous than before. the relationship moves away from point X′ too quickly). we are focusing on interorganizational governance. they have limited effectiveness to ameliorate the problems caused by excessive tie strength. Thus.. 2002). managers can additionally introduce rules to constantly change the personnel at their interface.g. Although these changes are not too costly. 2000.

1981: 353). Since parties may not agree with those terms and conditions. reducing the duration of its contracts may not grant a firm real autonomy if friendship ties still influence the choice of possible partners at the moment of contract renewal. 1997. 23 . This occurs when partners recognize that the opportunities for rent generation with the alliance are limited and jointly decide to pursue other opportunities (Doz et al.substantial changes in the extent of co-specialization or socialization. Zaheer et al. In addition. value. rotation of buyer and seller representatives may not change socially shared norms inducing the same dysfunctional consequences emanating from personal ties. it is possible that the new buyer representative will adopt similar policies used by the former representative when dealing with the supplier. a new buyer representative may have an indirect tie with a seller representative through direct friendship ties with former buyer representatives within his or her firm. i. bilateral termination—if feasible—alleviates the problems caused by tie strength since it effectively severs existing social ties and provides firms with autonomy to pursue more valuable opportunities and knowledge.. 13 For instance. 1998). Finally. For instance. 2001. buyers can demand that supply relations be put out for competitive bid to “test the market” (Eccles. To be implemented. bilateral termination is likely to involve non-negligible negotiation costs to determine the conditions to dissolve the tie and monetary transfers to liquidate joint ownership of assets.13 Alternatively. since attitudes towards particular partnering firms tend to be collective rather than simply individually defined (Inkpen et al.e. Bilateral termination also entails the downstream costs of building new relationships. bilateral termination can be in some cases unfeasible (Inkpen & Ross. 2001: 143). Although costly. Mandating that procurement transactions will be managed through an Internet “business-to-business” auction may have this precise effect (Lucking-Reiley et al. managers can bilaterally negotiate the termination of the partnership... the costs of strengthening newly formed ties. they may be mostly redistributing. A more radical option is to unilaterally terminate the partnership. In this case. changes in contract terms may not reduce interfirm commitment if social attachments largely contribute to the governance of the exchange. For instance. rather than creating... by which managers deliberately dissolve a long-term tie or open the relationship to alternative firms. 1998).

Under these conditions. but also to create incentives for incumbent suppliers to increase the efficiency of their production processes and pursue price reductions (Eccles. 1976)—unless. unilateral termination can also damage a firm’s reputation (Podolny & Page. Williamson. formal changes that most effectively weaken ties are most likely to increase the costs to subsequently strengthen existing or newly formed ties.. In sum. 1996: 112).14 The costs to implement unilateral termination tend to be substantial. as current and future partners will be unwilling to cooperate if they learn that the firm tends to destroy ties at its discretion. a new supplier with superior technology or radical innovation emerges. But even with these changes. Helper (1991: 820) documents that U. there are high downstream costs associated with unilateral termination. 2000). incumbent suppliers will have an advantage in competitive bidding (Laffont & Tirole. 1998). though changes that more quickly weaken ties are more costly 14 This tends to occur when a buyer faces switching costs to transact with new suppliers due to idiosyncratic routines and relationship-specific assets. U. Thus. In addition.Wise & Morrison. Perhaps more importantly.’ as one Ford executive put it. managers had to adopt new practices in the industry such as increasing the length of contracts (Helper. since the lack of mutual consent implies that parties may engage in costly litigation. resulting from their years of ‘cutting the legs out from under … our suppliers. 1988. 24 . For instance.S.S. of course. given their reputation of switching at will (Mudambi & Helper. similarly to the process of strengthening ties. Competitive bidding may not only be used to find new suppliers. 1991). 1981). 1998). automakers have faced “a legacy of mistrust. firms will be able to procure products at lower prices or benefit from new technology—it will also increase the difficulty to strengthen remaining or newly formed ties.” To restore cooperation. automakers have had difficulty triggering informal processes that strengthen ties. It can damage existing ties since opening up the exchange to alternative firms conveys “the risk of offending an important current partner that might compete with a business that is being courted for a future relationship” (Singh et al. although unilateral termination will quickly alleviate the restrictions imposed by strong ties—e..g. There also appears to be an asymmetry in this process: relationships can be more easily unraveled than developed.

Consider formal institutions. Moderating Effects The institutional environment in which exchange relations arise will alter the probability of observing churning ties. guarantee as much flexibility as possible to weaken that tie whenever it becomes strong. Informal institutions at a societal level will also influence the emergence of churning ties. On the other hand. 1999). The institutional environment of a society is the set of formal and informal “rules of the game” that constraint the behavior of individuals and firms (North. North.as well (e. Certain societies rely on committed exchanges because collectivist cultural patterns (Dore. 1995) and absence of trust in strangers (Yamagishi & Yamagishi. Regulatory controls on the formation and dissolution of interorganizational relations will inhibit the emergence of churning ties by creating an “artificial inertia” in existing ties. 1994: 39). managers need to employ formal changes that create as much commitment as possible whenever a certain tie becomes weak and that. When third-party law enforcement is effective and not costly. 1983. 2002). Thus. the Japanese government has had an important role in promoting strong ties between buyers and suppliers through its active programs to “organize the subcontractors into keiretsu (channeled groups) [where they] served the same contractor(s)” (Nishiguchi. 1990).g. 1997. There are. Greif. First. formal institutions that can actually encourage churning ties. Second. Hill. 1990). managers must employ changes that restore as much autonomy as possible but that do not severely undermine an existing tie or make it difficult to build new relationships in the future. large trade networks where individuals transact less frequently with the same firms will tend to emerge (Greif. litigation expenses and downstream reputation losses). For instance. however.. downstream. As a result. firms must necessarily resort to strong ties to promote cooperation (Kali. McMillan. 1994) inhibit the formation of new relationships outside restricted circles. firms can have higher confidence that dealings will be honored. the challenge in the management of churning ties is twofold. & Woodruff. when third-party enforcement is costly and ineffective. 1997. when weakening a tie. thus increasing their willingness to pursue new ties with strangers (Johnson. Although cooperation easily 25 .

if firms exhibit relational competence then cooperation will not need to be sustained through repeated interaction. and benefit from external relationships. 1994). to strongly commit (Barney & Hansen. and also how to manage their interorganizational relationships (Anand & Khanna. societies exhibiting individualistic cultural patterns and high levels of trust in strangers facilitate the establishment of churning ties since parties will tend to avidly pursue valuable opportunities even with unfamiliar firms. By contrast. Another moderating variable in our model relates to a firm’s competence to form.15 Summary of Propositions 15 It is likely that relational competencies are formed through cumulative experience with past alliances. firms with high relational competencies are more likely to bilaterally negotiate. 2000). as they will follow general norms such as reciprocity or integrity. Parties will be reluctant to violate social norms and transact with firms or individuals with whom they are not familiar.. Kale. 2000: 221). the resulting strong ties are extremely difficult to disrupt. as firms learn how to select valuable partners. 2000. This implies that firms exhibiting relational competence will not need to use costly formal mechanisms. since they will have ease in partnering with new firms. churning ties are not likely to be observed when such informal institutions are present. Relational competencies may also be associated with the existence of dedicated organizational structures to identify partners and manage a firm’s ongoing alliances (Dyer. managing its alliances. Thus. In addition. rather than unilaterally impose the termination of their alliances. Overall.. which affects the cost of employing churning ties. 1998). & Singh. 1999). relational competencies will reduce the need for costly formal mechanisms to form and dissolve relationships. Firms showing relational competence “will (1) more likely choose partners who will abide by relational norms and (2) understand themselves the value following relational norms” (Lambe et al. we use the term relational competence to describe a firm’s ability in selecting valuable and trustworthy partners. and curbing its own incentives to defect so that its partners will perceive the firm as trustworthy.unfolds in those societies through committed relations (Dyer & Singh. Following previous research (Lambe et al. such as joint ownership. the likelihood that firms will engage in new relationships and then switch to other partners will increase. thus. Gulati. 2001). maintain. As a result. 26 .

a firm should avoid 27 . and unilateral termination of the partnership. Namely. In the presence of conflicting contingencies. Indeed. and therefore (c) the frequency in which relationships are formed and dissolved in the context of churning ties will increase. they will be (a) less likely to use costly mechanisms to reinforce ties. rather than the extent of its strength (Burt. 1983. Therefore. P2. casual evidence shows that firms often develop committed relationships with some partners. <Figure 3 around here> CHURNING NETWORKS Our level of analysis is purely dyadic: we evaluate the dynamics of change in the strength of a single tie. Other authors still propose that the relevant issue in the management of networks is whether a tie is redundant or not.) P5. Formal and informal institutions will moderate the effect predicted by P1. and engage in arm’s-length exchanges with a large number of other firms. some authors propose that firms can form a portfolio of weak and strong ties. The following formal mechanisms can be used to strengthen ties. rather than unilaterally impose the termination of their alliance. 1992). (See our previous discussion for specific predictions. P4. a limitation of our model is that it disregards possible managerial actions that can address the tension between weak and strong ties by “optimizing” the network within which the firm is embedded instead of adjusting ties in isolation. and joint ownership. and (b) exchanges governed by churning ties will outperform exchanges governed by either weak or strong ties permanently. arranged in an increasing order in terms of their ability to promote strengthening and the extent to which they will make it more difficult to weaken the resulting ties in the future: loose contractual agreements.g. by either favoring or inhibiting the emergence of churning ties. Thus. long-term contracts. 1996). which supposedly combines the advantages of partnerships and arm’s-length exchanges (e. bilateral termination.We summarize below the propositions of our model. The following formal mechanisms can be used to weaken ties. arranged in an increasing order in terms of their ability to promote weakening and the extent to which they will make it more difficult to strengthen the resulting ties in the future: reorganization. Faulkner. schematically represented in Figure 3: P1. If firms have high relational competencies. (b) more likely to bilaterally negotiate. (a) churning ties—a pattern of periodically reinforcing and weakening interorganizational relationships—will emerge. such as joint ownership. Uzzi. P3.

forming a tie to an actor that is connected to another actor to which the firm is already tied. 28 .g. and weak ties for contingencies that call for autonomy (e. Conversely. specific assets). consequently. Therefore. the portfolio of weak and strong ties should be applied to the same exchange that requires both cooperation and autonomy. But indivisibilities and scale economies will make it costly to maintain more than one or a few partners simultaneously for a single exchange. Thus. Even if a firm tries to acquire new knowledge through weak ties. “a large network of strong ties to nonredundant actors is the best sort to have. & Borgatti. decides to 16 For evidence supporting this argument. or many weak ties with low cooperation. holding weak ties with alternative firms may damage a particular strong tie since the partner may interpret those weak ties as explicit exit options and. which alter the nature of ties over time. Thus. see Zaheer and Zaheer (1997) and Ahuja (2000). For the portfolio of tie argument. the portfolio of tie argument neglects the dynamic forces discussed before. Firms may simply be using strong ties for contingencies that call for cooperation (e. 1998). Fladmoe-Lindquist. continuous interaction with particular partners will tend to create idiosyncratic routines and co-specialization. those ties will not be useful from a practical standpoint because the firm may fail to interpret external knowledge and even convince the other parties to share it. Furthermore. which has a strong tie to another firm B. this does not necessarily mean that it is a response to conflicting contingencies. generic assets). Hesterly.” We contend that both arguments are unsatisfactory responses to the tension between weak and strong ties. which will make it increasingly difficult to transact with other firms.g. may become reluctant to cooperate (Jones. Rangan (2000: 826) posits.. see McEvily and Zaheer (1999) and Gargiulo and Benassi (2000).. the mix of weak and strong ties applied to a particular exchange is likely to change towards few strong ties with low autonomy. Suppose that a firm A. we first note that although most firms do have a portfolio of weak and strong ties. Thus. for evidence contrary to the argument. The redundancy argument also suffers from a similar shortcoming: it neglects endogenous changes in networks. 1992).16 A strong tie can still be useful if it is nonredundant (Burt. since this redundant contact is not likely to provide new information or opportunities.

However. 17 For instance. 29 .form a nonredundant tie to firm C. Namely. We contend. Despite its beneficial effects. for this reason. The consequence is that the tie A-C will become redundant. Dyer & Singh. Gulati et al. Initially. However. firms may need to continuously sever redundant ties or build non-redundant ones to increase the value that they can attain from external relations. as a static exercise. it is likely that firms B and C will decide to form a relationship. 1981: 391). nonredundancy tends to be unstable (Aldrich & Whetten. Thus. that network optimization requires dynamic strategies that are similar in nature to churning ties at a dyadic level. by transacting with firm C. says little about how firms should dynamically adjust their positions in a context of changing networks. in particular. CONCLUSIONS Given the increasing interest in models that describe how interorganizational ties contribute to firm performance (e. firm A creates an indirect tie between B and C. This discussion shows that the search for an optimal network configuration. Empirical research shows that the formation of these “cliques” does tend to occur (Gulati. firms may need to continuously weaken the strong ties and strengthen the weak ties in their portfolio to maintain an appropriate balance of each type of tie. 1995b). they will have improved information about each other in terms of their capabilities and trustworthiness. Eccles and Crane (1988: 89) show how certain customers “downgrade” certain banks formerly connected through a strong tie to “upgrade” other banks formerly connected through a weak tie. in their analysis of corporate customer-bank relationships. the mere fact that a firm exploits a nonredundant tie is likely to precipitate an endogenous change—the formation of redundant ties—that undermines over time the benefits that the firm can attain from that action.g.. Since the B and C share a common partner. 1998. 2000). a more careful examination of these dynamic strategies at the network level is beyond the scope of this paper.17 Similarly. the tie to firm C will provide firm A with novel information and opportunities. a careful analysis of the tradeoffs involved in the choice of alternative interfirm governance mechanisms is warranted. thus reducing its benefits as conduit of new information and opportunities.

Contributions to the Literature on Interorganizational Collaboration Our paper brings two main contributions to the literature. discusses a rather pervasive dilemma: in many circumstances.Our paper. which propose a static fit between tie strength and particular exchange or industry conditions.g. Das & Teng. our theory clearly runs against the view that relationship instability is dysfunctional. We offer a dynamic theory that explains how firms faced with this tradeoff can adjust their ties over time to increase alliance performance. firms want to combine the cooperation-based advantages of strong ties with the autonomy-based advantages of weak ties. Cho. Since firms cannot control informal processes that change the functionality of their relationships over time—i. by highlighting the role of conflicting contingencies.” In the presence of conflicting contingencies. Dyer. First. In addition. Within this perspective. firms can dynamically combine cooperation and autonomy by periodically employing formal mechanisms that weaken ties when excessive commitment damages autonomy and formal mechanisms that reinforce ties when lack of commitment hinders cooperation. vacillation can be indeed a successful strategy: churning ties can deliver superior alliance performance by capturing temporarily the benefits of both weak and strong ties.. the mix of autonomy and cooperation—they must use a limited set of formal instruments to alter the trajectory of tie strengthening or weakening. and Wujin (1998: 73) assert that “vacillating between arm’s-length relationships and partnerships is unlikely to be a successful strategy given the longterm commitment and relation-specific investments required for strategic partnerships to be successful. 1980). Our theory points out the imperative of dynamic models to predict patterns of interorganizational relations when conflicting contingencies and endogenous changes in the nature of ties render that static match impossible. in particular. 2000. For instance. our theory is consistent with dialectical models of interorganizational relations. which assert that contradictory forces are crucial to explain change (e. Zeitz. it adopts a completely different perspective from contingency arguments. Thus.e. they want at the same time commitment and flexibility. We contribute to this literature by describing both 30 .

1995b. as we discussed before. 1998: 70). is to assume that firms and their managers (through 31 . the decision to form relationships may actually be associated with the restructuring or termination of existing ties—as Richardson (1972: 896) puts it. “firms form partners for the dance but. they can change them.g. the termination of a relationship may be resisted by managers who “often staked their careers on the success of the alliance project.g.. 1998).the key sources of conflict and the resulting dynamics of change involving interorganizational ties. when the music stops. 1992.. Limitations and Possible Extensions An important limitation of our study is that we assume the existence of managers who monitor the performance of exchanges and adopt formal changes to restore either cooperation or autonomy. and vice versa (Podolny et al. it ignores a real possibility: that managers themselves may be part of the processes of socialization and learning which alter the nature of ties over time. our model potentially integrates two streams of research that have evolved rather independently: the analysis of tie dissolution (e. Park et al. Shan. the focus on isolated events of tie formation or dissolution provides only a partial picture of the dynamics and the management of interorganizational relations. Powell et al. 1988.” Thus. Our theory clearly shows that both analyses cannot be divorced. Our model fills this void by discussing how different types of formal changes to restructure or sever existing ties influence the formation of new ones. 1996. and thus may avoid any form of change. 1996) and the analysis of tie formation (e. 2001: 144). Gulati. and how the mechanisms employed to build new relationships affect firms’ ability to change them when necessary. Levinthal & Fichman. 2000. & Walker. commonplace in economics. since the decision to reorganize or terminate a tie has consequences for the formation of subsequent ties. Kogut.” even when the relationship proves to be unprofitable (Inkpen et al. Stuart. For instance. Although this allows us to focus on the main rationale of churning strategies.. Also. Dussauge et al. Kogut. 1989. Second. For instance... How then to justify the impetus to churn ties? The simplest way. a firm that prematurely severs a tie will have difficulty in building new relationships if its reputation is damaged.

e. firms’ relative bargaining power may also influence the emergence and management of churning ties. Such individuals correspond to the managers in our theory. 1988b) in the adoption of mechanisms to strengthen or weaken ties. A more refined justification comes from Beckert’s (1999) model of institutional change. we also ignore the role of firmspecific attributes affecting the emergence of churning ties. However. Such firm-specific variables can be incorporated in our model as factors that moderate the adoption of churning ties and the use of alternative formal mechanisms of change. For instance. 1998) may generate reputation-based benefits to other transactions even if that tie yields no direct value. Namely. Our model also ignores the role of partner asymmetries (Harrigan. yet inferior patterns of functionality—i. Thus. Our model does not consider. the value that firms can attain by partnering with firms holding beneficial positions in a given network. We admit. that intervention mechanisms are a black box in our model. however.. firms with a large set of alternative partners will be more able to build new relationship after the termination of an exchange than firms with few potential partners. managers may be more willing to unilaterally sever a tie if they have a large set of 32 . simply to increase their monopsony power and hence redistribute rents from suppliers. polar levels of tie strength in the presence of conflicting contingencies—it becomes increasingly salient that change could deliver performance gains. Apart from the consideration of relational competencies. Thus. as a tie approaches stable. For instance. and thus deserve further development in subsequent work. a tie with a prestigious firm (Podolny. such as competitive bidding. for instance.reputation concerns or incentives) face market pressures to make efficient decisions. Another limitation is that our model suggests that churning ties derive from firms’ willingness to increase the overall value of their relationships. This triggers the emergence of individuals willing to “destroy established taken-for-granted rules if they perceive such action to be profitable” (Beckert. 1999: 786). 1993. For instance. Helper (1991) suggests that buyers may pursue practices associated with weak ties. Stuart. firms may be tempted to alter the governance of their exchange to appropriate. rather than create value.

33 . the benefits to adopt a weak or strong tie are likely to be influenced by the extent to which other firms in the network employ weak or strong ties. and other agents. Salmi. 1999: 784). The adoption of standardized mechanisms such as Internet procurement can be self-reinforcing for this reason: the benefits to use those mechanisms increase as the number of firms adopting the same standard increases (LuckingReiley et al. investors. macro-level change at networks will provide a major leap towards the understanding of how interorganizational relations evolve and influence firm performance. the set of external opportunities available to other firms in the network increases. received and transmitted to other business relationships” (Halinsen. Although our model focuses on dyads. & Havila. possibly reinforcing the trend toward weak ties (Kranton. Integrating endogenous. Finally. 1996). micro-level change occurring at dyads with emergent. yield positive spillovers to other transactions. because firms may follow practices considered as legitimate by shareholders. it can provide the initial underpinning of a theory explaining the dynamics of networks if one considers that “change always emerges at the level of dyads. and less willing to do so if particular attributes of their partners. such as prestige. where it is potentially generated. Although in the previous section we discuss how our arguments can be scaled up to a network level. our unit of analysis is a dyadic exchange and thus fails to assess interdependencies in the governance of ties among several firms. 1983). 2001). when some firms adopt weak ties.. For instance. In the presence of those externalities. the adoption of either strong or weak ties can follow institutionalization processes (DiMaggio & Powell. other issues remain unexplored. we may see industry-wide cycles of tie change induced by emergent interactions between multiple agents. Likewise. Thus.alternative partners.

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TABLE 1 Fit (Alignment) Between Contingencies and Tie Strength Contingency Exchange attributes Asset specificity Difficulty to measure performance Type of knowledge Industry characteristics Technological innovation Market volatility Generic task objective Weak tie (autonomy) Low Low Codified High High Exploration Strong tie (cooperation) High High Tacit Low Low Exploitation 42 .

FIGURE 1 The Dynamics of Tie Change Cooperation S X Autonomy 43 .

FIGURE 2 Churning Ties Cooperation X S (a) X′ (b) Autonomy Managerial intervention to (a) weaken or (b) strengthen the tie Self-reinforcing processes causing further weakening or strengthening 44 .

FIGURE 3 The Theory of Churning Ties Loose contractual agreements Strengthening of ties when they become weak Long-term contracts Joint ownership P2 Conflicting contingencies P5 P1 Churning ties Relational competence of partners P4 P3 Institutional environment Weakening of ties when they become strong Unilateral termination Bilateral termination Reorganization Increasing ability to strengthen or weaken the tie 45 .

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