Interfirm Rivalry and Managerial Complexity: A Conceptual Framework of Alliance Failure Author(s): Seung Ho Park and Gerardo R.

Ungson Reviewed work(s): Source: Organization Science, Vol. 12, No. 1 (Jan. - Feb., 2001), pp. 37-53 Published by: INFORMS Stable URL: . Accessed: 26/01/2012 12:51
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1. These characteristics are embedded in the exchange of skills and capabilities. for. Graduate School of Management. Competitors are motivated to form strategic alliances with one another not only to improve their market positioning.which affect the process and outcome of the cooperative relationship. and manner in which trust can attenuate rivalry. a strategic alliance represents a temporal structureof exchange relationships that generate cooperative or competitive behaviors between partners. University of Oregon. the sheer complexity of the alliance might preclude the partners from evaluating their contributions over time. If the partners trust each other (confidence on the goodwill of the other). New Jersey 08840 Department of Management. No. Interfirm Rivalry. Rutgers University.This paper attemptsto distill. alliances between erstwhile competitors have increased significantly (Gulati et al. pp. that of The conceptual framework focuses on two primary sourcesof alliance failure:interfirm rivalryand managerial complexity. conflict in strategic directions. 12. these problems would be minimized. between partners. intentionally or unintentionally. depending on their private incentives. uoregon. Even in a highly complementary alliance. Parkhe 1993a. rutgers. January-February2001. Moreover. but also with the expectation of reducing rivalry or attenuating contractual hazards. 1994. Park and Russo 1996). they realize that they might compete with each other at some later stage. Even so. Ungson Department of Organization Management. problems of opportunism. We proposethat strategicalliancesfail becauseof the opportunistichazardsas each partner tries to maximizeits own individualinterestsinsteadof collaborative interests. andthe outcomesof alliancefailurecan be devastating. juxtaposes two countervailing tendencies: cooperative activities leading to the attainmentof goals that advance the interests of both partners and competitive behaviors by one or both partners in pursuing their self-interests (Kogut 1988. once completed. or simply cheating the other. As one partnerlearns faster about the other. particularly a partnership between competitors. creating even more asymmetry. Eugene.? 2001 INFORMS Vol. But trust and commitment are tempered by perceptions of gains and losses.However.Also. The paper extends the theoretical framework lookinginto a processmodel of alliancedevelby opmentandfailure. providing false information. New Brunswick. leading to perceptions that their contributions are unbalanced and asymmetric. 37-53 . derive. and role ambiguities between partners. equity considerations.e.00 1526-5455 electronic ISSN ORGANIZATION SCIENCE. coordination costs). Gulati 1999). andin aligning operationsat the alliance level with parentfirms' long-term goals (i. difficulty in coordinating partners. Oregon 97403 park@business. Cast in this context. agency costs).. they are willing to invest time and effort in anticipation of specific outcomes that would benefit them.. competitive factors that motivate the alliance can be 1047-7039/01/1201/0037/$05. both parties know that the current intention by itself is insufficient. dependencies escalate. several conditions affect stabilizing and destabilizing characteristics of alliances: need for specialization based on partner complementarity.the field still lacksa theoretical framework deto scribe the conditionsand dynamicsleading to the failureof strategicalliances. goal conflicts. Hence. it is a daunting task to manage conflicts arising from managerial and organizational dissimilarities between the partners. strategic alliancesfail becauseof the difficultiesin coordinating two independent firms(i. Within the context of our opening vignette. Nevertheless. Despitethe increased concernaboutmanaging strategic alliances. complexity in monitoring behaviors. and integratetheories across differentdisciplines into a unified framework offersa betterunderstanding Abstract Empiricalresearchindicatesthat more than half of strategic alliancesfail. they could act opportunistically by withholding important information. and if significant resources and commitment are expended on the alliance. Managerial Complexity) When two parties in an alliance cooperate at an early stage. (Alliance Failure. even if the period of collaboration is temporary. Hamel 1991.Interfirm A Rivalry and Managerial of Complexity: Conceptual Framework Alliance Failure Seung Ho Park * Gerardo R. the basic concept of an * bungson@oregon. In recent years.

etc. Despite overwhelming empirical evidence that alliances are unstable. 1989). While helpful in addressing specific issues on alliance management at the midrange level of analysis.not the failure of the alliance from each partner's point of view. It is possible that one partner's success means complete failure to the other partner. (1995) implore future researchers to be more systematic in their examination of the theoretical variables that promote cooperation (and competition). Harrigan 1988. poor communications. From a study of large U. Studies indicate that in cross-border alliances. In a broad sense. The objective of this paper is to develop a theoretical framework of alliance failure. adverse outcomes such as the loss of reputation. A Conceptual Framework of Alliance Failure In our view. Smith et al. The paper concludes with suggestions for future studies of alliance failure. if any.) to assess alliance outcomes (see Table 1 for summary). 1. UNGSON Interfirn Rivalry and Managerial Complexity only imperfectly redressed and can cause future problems and instability. Parkhe. futureempirical tests may remain fragmented. disagreements. January-February 2001 . etc. One strategy was to find systemic relationships among the different variables that account for failure in a strategic alliance. which makes it elusive to assess performance of an alliance (Anderson 1990). In developing this framework. U.SEUNG HO PARK AND GERARDO R. and anxieties over the loss of proprietary information. Within a broadenedtransactionalcost framework. which was much higher than the failure rate of internal venturing or corporate buyouts. impeding further theoretical development. Alliance failure often causes several other adverse effects to participants. two continuing developments have impeded the introduction of a systematic and comprehensive framework of alliance failure: the contestability of different interpretations (measures) of alliance failure.g.e. We also introduce some discussion of specific conditions that affect these two dimensions along the processes of managing alliances... as opposed to a generic partnership within an organization. Without a general theory of alliance failure for which boundaryconditions can be defined and tested. Studies have utilized different measures. including both objective (e. survival.Local management at the alliance level also differs from their parent firms in terms of the direction of 38 ORGANIZATION SCIENCE/Vol. they also tend to be anecdotal in origin. Alliance failure is also associated with more intangible. lack of top management commitment. such as technology (Hamel et al. but in different theoretical questions.competitive rivalry. there are still very few studies. learning. They also focus on alliance activities at different levels. with the failure rate reportedat or higher than 50% (Porter 1987. Contestable Measures A unique nature of the alliance is the involvement of two independent firms in one frontier. 1993a). These measures may reflect the performance of strategic alliances. and ex post variables and conditions underlying the stage-of-growth in alliances.g.S. two tracks were pursued. The relevant context is: What is distinctive within a strategic alliance. they have also retarded integration and subsequent advancement at a broader level of analysis. whose results have not been coalesced into a collectively coherent body of work. financial gains. i. Other adverse effects include operational difficulties and problems. At the parent level. countervailing tendencies are explored. ad hoc in content. we postulate that alliance failure results from competitive rivalry and managerial complexity that act as destabilizing characteristics within an alliance. duration. with different understandingof alliance goals. satisfaction. either the parentfirm or the alliance levels. goal attainment. failures abound. 12. The lack of a comprehensive framework has led to empirical fragmentation and has encouraged static representations of alliance failure. partners are often contradictory in their assessment of an alliance given the asymmetry in their goals and interests in relation to the alliance. While these reasons appear to be intuitively clear. and the lack of cross-fertilization between numerous theoretical schemes. in situ. Using this track. cultural differences. This is undertakenby postulating ex ante. On the surface. that provide comprehensive discourses on why alliances fail (Parkhe 1993a).however. No. Of particular importance. termination. Despite the popularity of strategic alliances and the purportedbenefits for participatingfirms. etc. and fragmented in their development. was distinguishing between failure in a strategic alliance and that in any generic partnership within an organization. Parkhe (1993b) criticized researchers for having noncumulatively focused on different dimensions of the strategic alliance.. corporations during the 1950-1986 period. competence building. Porter (1987) reported the failure rate of alliances was higher than 50%. firms incurred more serious losses than their counterpartsbecause of an involuntary loss of potential revenues and uncompensated transfers of rent-generating resources.S. there is no dearth of explanations as to why strategic alliances fail: poor management. that leads to particular patterns offailure? Our focus in this study is also limited to the failure of a strategic alliance as an alternative form of governance structure for interfirm transactions. failure occurs when excessive rivalry eclipses cooperative tendencies.) and subjective or process-oriented measures (e. lack of trust.

dissolving an ongoing cooperative structure is significant considering powerful socialpsychological motivations to preserve the cooperative relationships that entail transaction-specific investments. In addition to economic considerations. if not both.1%) 107 (50%) Conceptual 36 (30%) 149 (46. UNGSON InterfirmRivalry and Managerial Coanplexity the alliance. While parent firms try to fit alliance operations with their long-term strategic goals. (89) Koot (88) Hamel (91) Conceptual Case studies ORGANIZATION SCIENCE/Vol. alliance managers are more concerned with local interests as they try to adapt to market changes. he found dissolution to reflect poor financial performance in one.e. the instability of any alliance may be measured in terms of its expected duration. dissolution happens only when the alliance is not financially viable. Not surprisingly. It is not only in the economic but also in the psychological best interests of the organizational parties to find ways to Table 1 Summary of Performance Measures in Alliance Studies Authors Sample Size (Failure Rate) Operational Definition Performance Measures Alliance Level Survival (Stability) Franko(71) Tomlinson (70) Holton (81) Killing(83) Kogut (88) Beamish (87) Porter (87) Harrigan (88) Park & Russo (96) Harrigan (88) Kogut (88) Park & Ungson (97) Tomlinson (70) Good (72) Raffii (78) Holton (81) Killing(83) Beamish (87) Harrigan (88) Parkhe (93a) 1100(24. It is generally believed that a strategic alliance perceived as performing successfully by the partnersis more likely to remain in operation than those viewed as less successful (Porter 1987). but also social commitments and entanglements of individual agents. Another problem in the literaturehas been the difficulty in cross-validating findings from various studies because of their use of different concepts and measures of alliance outcomes (Parkhe 1993b). Porter (1987) contended that dissolution is significant because companies generally do not divest or shut down a successful alliance. January-February 2001 39 .7%) Chronic Dissatisfaction Poor-Good Mutual Agreement Mutual Agreement Subjective Index Composite Index Partner Level Achievement of Individual Goals and Learning Hamel et al.. No. therefore. dissolution of the collaborative relationship.3%) 66 (45%) 300 (50. Hence.8%) 204 (67. 1. parties. Even though disagreement exists regarding whether dissolution implies failure of a strategic alliance. Investments in interfirm cooperation include not only economic and technological resources.3%) 895 (54.SEUNG HO PARK AND GERARDO R. Kogut (1988) argued that dissolution typically reflects a business failure or irresolvable conflict among the partners. i.5%) Liquidation/Ownership Change Termination Complete Withdrawal Liquidation/Reorganization Termination Divestiture Dissolution/Acquisition Alliance Age Duration Financial Performance ROI Growth/Capital Expenditure Alliance Returns Conceptual 36 (36%) 66 (61%) 895 (54. if not failure. there has been substantialtheoretical and empirical supportfor dissolution as a sign of downside in interfirmcollaboration. 12. there is an emerging preference for dissolution as the appropriate measure of alliance instability. Despite the proliferation of measures. A fundamental premise is that a strategic alliance is not expected to last indefinitely and. instability may be signaled by unexpected termination.

congruence model (Barkema et al. studies often define successful collaboration as a stable business relationship that meets the needs of both partners over the long term while dissolution creates long-term political tensions (Franko 1971).depending on their private incentives. not necessarily the failure of partners. resource-based view (Eisenhard and Schoonhoven 1996). Given this confusion regarding the concept of alliance failure. there has been little effort to integrate these multiple views and to look for the underlying theoretical constructs that could tie these eclectic explanations together. While the assumptions and approachesvary. In international alliances. workflow interdependence theory (Cummings 1984). This explains why the field still remains so fragmented and is lacking a systematic framework to explain alliance failure. and investment option theory (Kogut 1991) have been used to relate alliance failure to opportunistic hazards of competitive collaboration. Accordingly. however. they mostly adopted contingency approaches. Toward a Synthesis Earlier we posited a strategic alliance as a temporal structure of exchange relationship that generates cooperative or competitive behaviors between partners. etc. such as coordination costs and agency costs. such as resource dependence (Cummings 1984). organization science. along with transaction-cost theory and agency theory (Geringer and Hebert 1989). Accordingly. As the summary in Table 2 indicates. that is a hybrid of market and hierarchy. Geringer and Herbert 1989). business strategy. Principles of market and hierarchy are still operative in an alliance although the alliance is a governance mechanism meant to remedy failures of these governance structures. which vary in substance and underlying contexts. such as parent firms. Gulati et al. informationprocessing model (Mohr and Spekman 1994). with each theory addressing a small part of the relationships leading to alliance failure. these studies suggest that interfirm cooperation and competition are embedded in social conditions or contexts that structurethe "rules of conduct" to govern cooperative and competitive behaviors. and managerial complexity. we hope our effort lays the foundation for future research to develop a general theory of alliance failure. and key metaphors and generating forces that have been used to explain the failure of strategic alliances. agency theory (Geringer and Hebert 1989). Table 2 summarizes these theoretical perspectives. our model does not fully address issues on alliance failure at other levels. Studies also show that dissolution is highly correlated with parent firms' reported dissatisfaction with the venture and perceptions of how the ventures performed relative to their initial objectives (e. which cover most key issues as discussed in previous studies. and strategy-structure fit model (Holton 1981) have focused on managerial and organizational problems. and implemented. multiple perspectives introduced in earlier studies lay the theoretical foundation in our attempt to develop a comprehensive theoretical framework of alliance failure. 1996). strategic behavior theory (Kogut 1988). Although not complete in integrating these multiple perspectives. or theoretical constructs than the failure of alliances as an alternative governance mechanism for interfirmtransactions. So far. which highlights two of the dimensions most commonly addressed by these perspectives. January-February 2001 ORGANIZATION . various organization theories. Not surprisingly. 1. The contractual stipulation of strategic alliances. 12.Because our focus lies on the failure of a strategic alliance. Although these theories were unique in their contribution to explaining alliance failure. explains this dual natureof alliance failure. scholars have used a wide range of disciplines to explain the failure of strategic alliances: for example.g.. Also. game theory (Parkhe 1993a. it appears that they converge into two primary dimensions of alliance failure: rivalry (or appropriation hazards) and managerial complexity. dissolution may best reflect the concept of alliance failure as featured in our conceptual model of alliance failure. In particular. The study of cooperation and competition tends to be multifaceted and multidisciplinary. chosen.SEUNG HO PARK AND GERARDO R. These conditions influence how such behaviors are defined. UNGSON Interfir7n Rivalry and ManzagerialComnplexity preserve their socially embedded relationship as they face adverse situations (Ring and Van de Ven 1994). to explain alliance failure. our model focuses on the assessment of strategic alliances as a governance mechanism that is formed to pursue collaborative interests between two or more independent firms. learning theory (Hamel 1991). these multiple perspectives can be complementary. sociology. transaction-cost economics (Buckley and Casson 1988. Strategic alliances purportedlyprotect against the hazards of market and hierarchy through partners' investment of 40 SCIENCEVol. including disciplines from economics. Parkhe 1993a). with little crossfertilization. political science. No. evolutionary model (Koza and Lewin 1998). 1994). Below we develop a conceptual framework of alliance failure by focusing on these two dimensions. Lack of Cross-DisciplinaryIntegration Another problem in studying alliance failure is the proliferation of theories on the subject. the theoretical framework of alliance failure developed below is limited to the alliance level. Our discussion of different theoretical approaches in the preceding section suggests that alliance failure can arise from rivalry between partners.

January-February 2001 41 . Buckley and Casson 1988. 1. Park and Russo 1996) Managerial Complexity & Uncertainty Information-processing model (Mohr and Spekman 1994) Organizational control (Yan and Gray 1994. Gulati et al. Previous studies related alliance failure mostly to competitive issues between partners (Kogut 1988. From an in-depth case study. nor undersocialized. Even with minimal opportunism. 1988) Role conflict and formalization (Shenkar and Zeira 1992. Geringer and Hebert 1989. In a cooperative relationship. No. partners face two ORGANIZATION SCIENCENVOl.SEUNG HO PARK AND GERARDO R. Barkema et al. 12. Efficiey. However.such as an involuntary loss of potential revenues and uncompensated transfers of rent-generating resources. and coordination and agency costs resulting from complexity and uncertainty in managing a cooperative relationship. UNGSON InterfirmRivalry and Managerial Complexity Table 2 Theoretical Perspectives on Alliance Failure Theoretical Perspectives Metaphors Mutual forbearance Opportunism Trust Behavioral transparency Reciprocity Reputation General Forces Incentives among the partners Nature of competitive rivalry Goal divergence Operational overlap Asymmetric dependence & learning InterfirmRivalry Transaction cost theory (Kogut 1988. which in return drive strong incentives for them to honor contractual terms of the alliance. Ring and Van de Ven 1994) Agency theory (Geringer and Hebert 1989) Transaction cost theory (Park and Ungson 1997. An idealized economic exchange is neither oversocialized. 1994) Resource dependency theory (Cummings 1984) Transactional value approach (Zajac and Olsen 1993) Resource-based view (Eisenhardt and Schoonhoven 1996) Investment option theory (Kogut 1991) Learning theory (Kogut 1988. partners also face difficulties in coordinating their activities toward collective operations and in linking local operations at the alliance level with the partners' long-term strategic goals.g. Holton 1981) Organization (Cultural)congruence (Park and Ungson 1997. where partners remain as isolated and rational economic units (Larson 1992). Figure 1 presents a model that explains alliance failure according to these two sources of problems: opportunistic hazards due to rivalry between partners. technology (Hamel 1991). Killing 1983. Park and Russo 1996) Strategic behavior theory (Kogut 1988) Game theory (Parkhe 1993a. Parkhe 1993a. Reputation.C t Equity. Defillipi and Reed 1991.. we believe managerial problems are equally-if not more-important in explaining the failure Figure 1 |Interfirm Rivalry > An Integrative Model of Alliance Failure Oprunistic 70 H az ~ r t s | Asynumetric Rent/ResourceAppropriation| l Adv. Larson (1992) concluded that economic transactions cannot be separated from the social context in which they take place. especially in the case of crossborder alliances. Unlike this purported belief. ALLIANCE FAILURE I Manageria C p | it3 Coordinatio Difficulty | Strategic. Geringer and Hebert 1989) Conflict Dissimilarity Ambiguity Control Uncertainty and equivocality Cultural dissimilarity Organizational misfit Excessive formalization Adaptive capacity Interpersonal dynamics time and resources. studies have indicated that there still remain competitive threats to the partners. however. Parkhe 1993a). Hamel 1991) Workf low interdependence view (Cummings 1984. whose primary governance mechanism is values and norms. e. Brown et al. Structural | Misfit l L | l 1II Bureucratic & Agency Costs Rigidity Organizational of strategic alliances. 1996.erse Bargaining ~~~ |Tust.

The presence of competition within a cooperative arrangement causes a high level of transactioncosts as partners adopt various contractual stipulations to avoid opportunistic hazards. In a competitive alliance. It is. Collective benefits from an alliance are typically future-oriented and uncertain. these stipulations and costs involve those in acquiring and processing information. and about their capabilities. however. and functional skills is only about one in three. geographic markets. 34-35) concurred that "a short-term view is likely to prevail when the agent expects the venture to fail because of cheating by others. GE and Rolls Royce formed a strategic alliance to manufacturejet engines for commercial airliners. Kogut (1988) noted that even equity-based alliances. essential that parties meet both formal and informal obligations to sustain a cooperative relationship. which further aggravates opportunistic tendencies in an alliance. respectively. a major transactional threshold has been breached. and disfavored. and that once an exchange is moved away from a hierarchical operation. while enabling them to avoid some of the development costs required to design a new engine from scratch. Our model in Figure 1 addresses both economic and transaction-relatedissues and social-psychological. Williamson (1991) described strategic alliances as inherently temporal. For so long as interfirm transactions are made within a strategic alliance. Empirical evidence also supports that strategic alliances between direct competitors are most likely to fail (Park and Russo 1996). there is an incentive to deviate from an institutional rule. monitoring and administering contractual promises. short of full ownership. The former type of uncertainty refers to a social-relations condition. the latterto an economic condition. According to a transaction cost perspective. 12. The GE-Rolls alliance illustrates that even when strategic alliances between competitors are formed to improve their competitive positioning. Interfirm Rivalry. They concluded that managers typically choose direct competitors as partners in pursuit of short-term synergy through consolidation of overlapping product and market positions. organizational. and enforcing contractual promises. at each iteration. such competitive alliances tend to fail because individual partner goals become misaligned with these collective goals. especially when the lawful gains from insisting upon literal enforcement exceed the discounted value of continuing the cooperative relationship. or by fiat (as with hierarchy). The risk of prejudicing the venture through its own cheating is correspondingly low. affecting personal and economic trusts. The success of an alliance depends on mutual consent from partners. The model also indicates that trust and commitment work as countervailing tendencies in these relationships by narrowing the disparity in the partners' competitive incentives and managerial practices. particularly in that changes in an alliance cannot be made unilaterally (as with market consent). application of the game theory suggests 42 ORGANIZATION SCIENCE/Vo1. defection from the spirit of collaboration is inevitable. competition will motivate partners to pursue individual interests at the expense of the other partner (Parkhe 1993b). pp. this is not necessarily congruent to their individual goals. However. this ideal fit was scrapped in two years because the two companies' cooperation in making jet engines turned into competition. However. particularly when external conditions change over time. The prisoner's dilemma problem depicts conditions under which. 1. Interfirmrivalry in an alliance also makes mutual forbearance less appealing to the partners as they lack a long-term view. No. The GE-Rolls alliance seemed to be an ideal way of getting the two partners into markets where they had been weak. The potential transactioncosts also involve legal and organizational costs in coordinating activity and enforcing conventional behaviors. The same competitive motives to form an alliance accounts for the eventual demise of the alliance (Kogut 1988). Both sides realized that cooperation would not be possible given the direct competition and the lack of trust between them (Wall Street Journal 1986). while opportunity costs from cheating are more immediate and often tangible. and managerial issues of alliance failure through the two dimensions of competitive rivalry and managerial complexity. Buckley and Casson (1988. Bleeke and Ernst (1993) reportedthat the success rate for alliances between competitors with similar core businesses. Because of the need for both formal and informal safeguards." The prisoner's dilemma also provides an insight about how competitive rivalry emerges within an alliance (Parkhe 1993a). unstable. as illustrated by the GE-Rolls alliance. respectively. and there may be considerable advantages in being the first to cheat because the richest pickings are available at this stage. cannot fully resolve the potential for competitive conflict. but this takes time. In 1984. As long as an alliance remains as an alternative mode of competition. UNGSON InterfirmRivalry and Managerial Complexity prime uncertainties: uncertainties about the people and organization. Park and Russo concluded that the failure of strategic alliances is primarilyattributableto causes associated with exchange between distinct parties.SEUNG HO PARK AND GERARDO R. January-February 2001 . A partner's opportunistic behavior brings immediate realization of individual goals without facing the uncertainty of long-term returns. Formal contracts between parties typically codify only a minimal set of obligations while a broader set of obligations is determined informally (Buckley and Casson 1988).

No. Underlying rivalry between partners ORGANIZATION SCIENCE/Vo1.S. UNGSON Jiiterfirmn ManazgerialCom7>plexity Rivalry aniid that although each partner does better when all act cooperatively than when all act noncooperatively. Integrative alliances. Both parties in an alliance can gain considerably by divulging meaningful proprietary information. resource-based view. adverse consequences will result in the event that both parties do not cooperate. It is likely in an alliance that the resource-advantaged partners will appropriate the economic rents of their less-advantaged partners. it is difficult to develop trust between partners. Reich and Mankin (1986) criticized that unintended unilateral transfer of technology competencies from U. than sequential alliances where each partner' contributionlies on a sequential path s with clear boundaries between partners. firms to their Japanese partners has caused the erosion of U. In fact. depending on their propensity to compete or cooperate. However. when partnersjointly manufacture a new good). Opportunistic hazards are inevitable in strategic alliances because of this competitive rivalry between partners. This dimension of alliance failure is thus closely tied with partners' incentive and motivation in a cooperative relationship. (1994) suggested that partners can avoid the prisoner's dilemma by restructuringthe nature of cooperative decision making. Resource appropriationis also affected by the pattern of interdependence between the partners(Park and Russo 1996). firms' resource bases and competitive advantages. require more frequent and intensive information flow. Resource appropriation is more probable in the direction of partnerswith more ambiguous. which creates the prisoner's dilemma. such as transaction-cost theory. and resource dependence theory. firms are heterogeneous with respect to their resources/capabilities endowments. The game theory model implies that strategic alliances fail not because of poor decision making by managers. in turn. in which the partners' contributions represent a pooling of their talents (e. and absent some linkages-like alliances-firms are stuck with what they have because of imperfect mobility and complex development process of resources/ capabilities. whose primary emphasis is on pursuing self-interests over long-term collective goals. which has been the main cause for proliferation of technological alliances in recent years (Eisenhardt and Schoonhoven 1996).SEUNG HO PARK AND GERARDOR. Partners face constant temptations to renege on an agreement because a partner that does not renege. As the interaction continues.g.Hamel (1991) reportedthat several partnersin his study regarded alliances as transitional devices where the primary goal was to internalize partnerskills. Studies indicate that integrative alliances face a stronger threat of appropriation hazards where partners may lose important knowhow and its competitive basis. it is possible that one of the partnerscould have opportunities to gradually expose and appropriate the other's key firm-specific assets. Within this perspective. Interfirmrivalry is an issue that resides in the natureof cooperation and partners' role and disposition toward an alliance. can result in poorer performance for both parties and failure of the alliance. partners sacrifice collective goals in pursuit of private self-interests. will do worse than when all partners renege. learning theory. 12. any one partnercan do better by acting noncooperatively when all other partners act cooperatively. 1. This is true unless the pattern of payoff is adjusted to encourage mutual coordination of trust through continuing interaction between the partners (Zajac and Olsen 1993). while its partnerdoes. In a competitive alliance. In summary. creating a situation similar to mutual hostage and credible commitment. which.S. game theory. Because partnersexpect better payoffs from the alliance than they would without the alliance. Still another perspective for understanding rivalry comes from the resource-based view of the firm. Subsequently. These appropriation hazards eventually lead to the failure of the alliance. Both parties stand to lose or gain. It is easier to acquire existing resources/ capabilities from alliance partners than to develop them internally. Partners may initiate unilateral commitment by committing to one of the choices already available to them. they may restructure the decision making into a sequential process instead of a simultaneous one. There exists a threat of each partner pursuing short-term and tangible gains by appropriating its partnerand reneging on the contracts. The partners with transparent resources and capabilities are more vulnerable to resource appropriationby the other partner. immobile resources appropriatingthe less ambiguous resources of their partners. As customarily thought. This line of studies focuses on rivalry between partners. strategic alliances become a costly governance structure to arrange interfirm transactions as partnerstry to employ safeguards against these potential hazards. Resource endowments are sticky over any strategically relevant time frame. one party stands to lose a lot if it provides this information while the other party does not reciprocate it.. and once each party begins to doubt the other there is often no end to it. various studies have attributedthe failure of strategic alliances to interfirmrivalry by applying multiple theoretical perspectives. The appropriation hazard is further heightened as the partners differ in their capabilities to learn and internalize external capabilities (Hamel 1991). Therefore. in the absence of binding contracts. Gulati et al. January-February 2001 43 . the party gains the advantage by holding out. but because of the nature of incentive structure in a prisoner's dilemma (Parkhe 1983a).

social. Implementing an alliance is a difficult task because of differences in partners' managerial and organizational practices. Strategic alliances often involve managers from different parent companies with different national. Managerial Complexity. The dynamics of the exchange changes the balance of contributions. In the case of cross-border alliances. which combined Olivetti's competence in global marketing and AT&T's technological superiority. greater coordination between more specialized partners is needed. Olivetti was an extremely aggressive. As long as this competitive uncertainty continues. technocratic management culture. However. the social context in which they operate is partly defined by the cultural and institutional backgroundof the nationalities the partnersrepresent. No. or perhaps to maintain secrecy in negotiating and planning such ventures (Cascio and Serapio 1991). leading to the failure of the alliance. cultural. the lack of information that parties need to have to enable them to coordinate their specialized activities may impede cooperation. 1. Without the exchange of proper information over time. and economic backgrounds. primarily due to managerial and organizational incompatibility. because the defects in alliances often stem from the unobtrusive influence of national culture on behavior and management systems. Interfirmrivalry. Lane and Beamish (1990) argued that cultural compatibility between partnersis the most important factor in the survival of a global alliance.National culture then affects managerial behavior and moderates the relationship between structural and economic variables and performance of the alliances. it is difficult to develop trust between partners and the alliance loses its advantage as a transactionalmechanism over market and hierarchy.SEUNG HO PARK AND GERARDO R. Even when the overriding goal is to cooperate. primarily related to economic. The logic for collaboration is that each partner derives value from coordinating specialized activities that far exceed the costs of coordination. it is difficult to sustain this position over time. they also experience agency problems in aligning their interests with alliance managers who do not necessarily work for their parent firms' interests. In the context of alliances. was considered a perfect match. For example. such as Simon (1947) and Barnard (1968). strong economic and strategic complementarity and the absence of rivalry and asymmetry between partners do not necessarily lead to success. 12. Top managers. at least in economic terms. if PartnerA has specialized in a particular skill. Coordination problems within the alliance stem from the complexity of activities that arise from specialization. often devote more time to screening potential partners in financial terms and controlling the relationship than to managing the partnership in human terms. January-February 2001 . and transactional issues at the interorganizational level. UNGSON InterfirmRivalry and Managerial Complexity presents a situation in which each partner weighs gains from the collective operation against individual interests as new opportunities emerge in the market. Despite such strong economic and strategic compatibility. Strategic alliances also fail because they require excessive effort to coordinate and integrate two independent organizations which result in a high level of managerial complexity and uncertainty. however. The complexity of activities that result from the difficulty in accessing specialized or idiosyncratic knowledge creates difficulties in communication and may prevent effective cooperation. Lack of fit with a partner's culture also leads to poor communication and mutual distrust. explains only part of the reasons for alliance failure. fast-moving. making coordination more difficult (Park and Ungson 1997).Along with coordination costs as partnersstrive to work together. have argued that this uncertainty and complexity in information processing is why complete cooperation is not possible. which goes far beyond simple exchange of competencies. alliances are formed because the gains from specialization override the costs of coordination. Partners from different national cultures tend to experience a lack of fit in organizational and strategic practices. strategic. however. Managerial complexity and uncertainty also poses another major problem in managing an alliance. which may be due to the belief that these can be worked out later. and Partner B has a distinctive edge in manufacturing. such as research and development. entrepreneurialorganization while AT&T was regarded as the ultimate example of professional. partnershipscan erode into adverse. In a most basic sense. It has been proposed that the similarity of cultural values may reduce misunderstanding between the partners. Specialization by discrete parties creates the need for collaboration when further specialization proves costly. political. Successful alliances require nurturingthe collaborative relationship and creating new value together. Early writers. this alliance was troubled from the beginning. Unless this is corrected. 44 ORGANIZATION SCIENCE/VOl.forging an alliance between them to meet predetermined goals would be more efficient than if they had to learn each other's specialties. however. which may create unresolved conflicts. coordination difficulties will overwhelm cooperative activities. competitive situations. As this case illustrates. People-related issues are often not addressed until an alliance is formed. and that culturally distant partners experience greater difficulty in their interactions. creating asymmetric dependence (Hamel et al. The AT&T-Olivetti alliance in the early 1980s. 1989).

The agency problem was obvious in the Yamatake-Honeywell alliance as Honeywell and the alliance both entered China and ended up in direct competition (Gomes-Casseres 1996). which weakens potential benefits of the alliance. Alliances are typically undertaken in highly uncertain and risky settings. Moreover. Disagreements over operating strategies. Therefore. This is because decisions at the alliance level have direct effects on the parents' overall costs and revenues. and the like can become so great that one or more of the partnerseither wishes to withdraw from the alliance or at least is chronically unhappy with the operation of the enterprise. As dissimilar partners may expend time and energy to establish standard managerial routines to facilitate communication. Even though empirical findings are conflicting. creating a high level of outcome uncertainty and aggravating the problems of monitoring managers' activities. there should be tight and effective monitoring of the alliance in order for it to achieve its objectives (Franko 1971). In an unbalanced alliance. Park and Ungson 1997). January-February 2001 45 . Brown et al. this allowed them to accept unusual levels of personal risks and to deviate from corporate norms in making the partnership work. Alliance managers often lack information about the specific expectations of different managers in each parent firm. (1988) conjectured that organizational compatibility is a more significant factor than national cultural differences in explaining the outcome of an alliance. Yan and Gray 1994. Doz (1988. serving two bosses and two sets of expectations.SEUNG HO PARK AND GERARDO R. the emerging patterndirectly relates management control to alliance performance (Yan and Gray 1994). the exercise of extensive control (and formalization to manage the control process) over an alliance' s activities and decisions may incur a high level of bureaucraticcosts and limit the efficiency of the alliance. either because they were already marginal in their own company or. differences of opinion about dividend payout policies. Thus. the nondominant partnerhas an a priori notice that their pursuit of individual interests may be difficult (Park and Russo 1996). Strategic alliances also face agency problems in integrating alliance activities with the parent firms. control may also lead to increased overhead costs because it implies more responsibility and resources for the partner(Geringerand Hebert 1989). each partner's performance. quality control methods. in career terms. UNGSON InterfirmRivalry and Managerial Complexity In addition to the difference in national culture. on the contrary. marketing policies. they may incur higher costs and mistrust relative to a strategic alliance with similar partners. In both cases. policies. The employment relationship between the parent organization and alliance managers reflects the basic agency structure of a principal and an agent who have different goals and attitudes toward risk (Holton 1981). and the different expectations of host country organizations with which they must interact. p. much less deciding their appropriateincentives. is equal. dissimilarities in organizational structuresand processes can create problems in coordination. Excessive control by a foreign partner over a local alliance often hinders the autonomy and flexibility of the alliance and its management. Because an alliance is a hybrid of more than two independent firms. because their position was so secure as to be unassailable. 335) described this conflict in the following terms: "Most of them (alliance managers) had little to lose. the failure of a strategic alliance is also caused by how compatible the partnersare in regardto specific organizational characteristics (Doz 1988. it is critical to find the strategy-structurefit at which the margin between benefits ORGANIZATION SCIENCE/Vol. Yan and Gray (1994) argued that when the control is even between partners. although incentives to cheat are greater in a dominant alliance. It has been reported that most alliance managers often disregarded the impact of alliance activities on parent firms' operations (Holton 1981). This conflict between parent firms and the alliance is why control has been a variable of interest in prior research (Geringer and Hebert 1989). 12. Alliance management thus needs to exert costly informationsearch effort to reduce these uncertainties and promote a strategic fit of allying firms with the alliance. it is difficult and costly to verify what alliance managers do. With the inherent system multiplicity." Agency problems are exacerbated by strong interdependence between the alliance and the parent organization. and methods often arise even when the alliances are quite self-contained and have a minimum of interaction with other units within the foreign-based multinational partner's operations. There is also a high degree of uncertainty and equivocality in managing an alliance. No. Control helps the parent firm to achieve the full potential of their strategies and to attain their objectives by reducing agency costs. Findings also suggest that problems in piloting a strategic alliance most likely occur when control is equally shared. alliance managers are prone to role conflicts and ambiguities (Shenkar and Zeira 1992). at least as assessed by its own perspective. they expect at least some ex post strategic choices to diverge from what they would have chosen. 1. However. Accordingly. Partly as a consequence. Dominant ownership can help avoid agency problems by simplifying the control process and maintaining easier integration with the parent firm's strategic direction. Even so. debt-equity ratios. the different expectations of different employee groups in the alliance.

By extension. as illustrated by the trouble in the YamatakeHoneywell alliance. and between partnersand the alliance. Previous studies point out the importance of complementary needs for the viability and potential of an alliance (Porter and Fuller 1985). the alliance was an uncomfortable marriage from the beginning. These types of alliances are based on highly complementary strategic interests between partners that can easily converge toward each other. such as culturalcomplementarity. we have illustrated the sources of alliance failure in terms of interfirmrivalry and managerial complexity. As strategic alliances fail because of economic and strategic incompatibility. The trouble in the Yamatake-Honeywell alliance illustrates the importance of maintaining balance in controlling an alliance. Strategic alliances fail when there is strong rivalry or a high level of managerial complexity. in the process of coordination. These theories focus on managerial complexity and uncertainty in coordinating the relationships between partners. While they are conceptually distinctive. and agency theory. these two components are inseparable in practice. and partners become hesitant to make a strong commitment to the collaborative operation. These managerialand organizationalconcerns in strategic alliances are rooted in various theoretical perspectives. These two dimensions represent strategic and managerial issues that affect partners' motivation and ability to continue the cooperative relationship. 1. Along with appropriationhazards. the partnersare easily able to understandand trust each other because of similar cultural and organizational backgrounds and strong economic complementarity (or weak rivalry). There is thus little rivalry in the alliance and cooperative behaviors become more compelling. strategy-structurefit. that become the sources of coordination and agency costs and organizational rigidity of the alliance. they were not willing to share their own design skills and marketing strategies with their partner. these managerial concerns incur a high level of transaction costs. and allow enough freedom for alliance managers to flexibly respond and adapt to the needs in local markets (Bleeke and Ernst 1993). We can also expect similar economic mindsets and strong organizational 46 ORGANIZATION SCIENCE/VO1. Differences in cultural values and organizational practices also made it difficult to develop a coherent strategy to challenge GM.SEUNG HO PARK AND GERARDO R. This would be an ideal setting for interfirmcollaboration without any serious transaction and coordination costs. but failure often results from the interaction between these components. It is importantto maintain flexibility at the alliance level because it is inevitable that internal and external conditions of the partnersand the alliance gradually change over time. they realized that they could not agree on the management structure necessary to launch the alliance. This type of alliance is likely to be between direct competitors. it is difficult to develop a trust-based relationship.information-processing model. They also become easily committed to collective interests that can be carried out even at a low level of socialization between partners. even before the actual collaboration starts. This will minimize potential agency problems. After more than a year of discussing a wide range of proposals. The most unstable type of alliance is one featured with a high level of rivalry and managerial complexity. Coordinationcosts are high because it is difficult to resolve organizational dissimilarities and to manage cooperative processes. Such an alliance also becomes a highly inefficient governance structureto pursue interfirm transactions. January-February 2001 . The Ford-Volkswagen alliance set up in the 1980s to expand their market basis in Latin America represents a typical case of this type of alliance. often becomes a serious problem in working with parent firms. but the eventual conflict between Honeywell and the alliance is attributedto the weak control over the alliance. UNGSON Initerfirm Rivalry and Managerial Complexity and costs from an alliance becomes optimal. This is what happened in the proposed alliance between Ford and Fiat in 1995. especially bureaucraticcosts and agency costs. Accordingly. we propose that the alliances with weak rivalry and low managerial complexity are least likely to fail. causing them to withdraw their commitment to the alliance. Although the partners had a common goal of establishing a critical mass in Latin America's emerging markets. achieve tight integration between the parent firm and the alliance. There is little strategic and organizational complementarity in this type of alliance.12. organizational congruence. alliances also fail because of difficulties in implementing the collaborative efforts and integrating them with the parent's strategic objectives. Excessive flexibility at the alliance level. Honeywell's hands-off approach explains the initial success of the alliance. Interaction Between Interfirm Rivalry and Managerial Complexity In the foregoing sections. participantsput private interests over collective interests and have difficulty in coordinating managerial and organizational differences between them. Because the partners were direct competitors in most other markets. No.which furthercontributes to improving transactionalefficiency. Alliance partners often end up wasting valuable time and resources to understand each other. as indicated by strong rivalry. however. The differences in management and operational structures were so severe that they decided it was impractical to enter into a cooperative relationship. who was a major competitor in the market.

involve a high degree of interdependence and coordination between partners. Because they have strong economic incentives and are more willing to cooperate. Presumably. The likelihood of failure in these alliances depends on how the partners manage the problems caused by either their competitive intentions or organizational and managerial dissimilarities. 1. these alliances cannot avoid possible transactionhazards because each party focuses more on its self-interest. Governance structuresthat are closer to a marketmechanism. which cannot be acquired efficiently through individual operations. marketlike governance structures require (relatively) a much lower level of interdependence and a simpler coordination process than hierarchy-like governance structures. given the competitiveness between the partners. Firms would be better off adopting different transaction mechanisms for similar economic interests rather than entering into an inefficient alliance structure. On the other hand. this only compounds managerial complexity as tighter monitoring is needed. and Siemens illustrates a failure resulting from high coordination costs. Strategic alliances fail when either or both of these first-orderand second-order conditions are not met.SEUNG HO PARK AND GERARDOR. which required a high level of interaction among the partners. each partnertends to disguise or limit its contribution. Toshiba. This does not necessarily imply that alliances with high managerial complexity and low rivalry do not fail. as long as there are sufficient economic gains. Especially when alliances involve technology transfer. there is reluctance to provide extensive information about the technology. Alliance partners would be more eager to work out conflicts from managerial and organizational differences as long as potential economic benefits remain strong. An alliance is able to sustain its structureand remains as an efficient mechanism for interfirmtransactions as long as partners'economic benefits overshadow potential costs in managing the alliance. Williamson argued that intermediate types of governance structures are not impervious to opportunistic threats. Hierarchy-like governance structures (e.IBM perceived Toshiba as excessively group-oriented and Siemens as overly concerned with costs and details of financial planning. which help them understand each other better. Unlike the previous two types of alliances. Expecting to be cheated. Direct rivalry between partners. its success subsequently depends on the dynamic change of each partner's economic interests and the effective implementation of alliance activities. it is also much easier to develop mutual trust. However. Firms enter strategic alliances in pursuit of their self-interests through collaboration with other firms. UNGSON Initerfi Rivalry anidMalnagerial Complexity rm transparencybetween the partners. there is much ambiguity in predicting the outcome of the alliances with either strong rivalry or high managerial complexity. despite strong economic interests for the partners. Once partners develop trust toward each other.g.and interfirmcoordination becomes a highly demanding and difficult task. however.g.. This alliance was set up to design and manufacture256-megabit chips.As a result. 12. we discuss the underlying conditions that affect interfirmrivalry and managerial complexity in an alliance.. would work better in an alliance with weak rivalry but high managerial complexity. The strong economic incentive also allows effective socialization and governance in managing the cooperative structure. January-Febiuary 2001 47 . such as hierarchy-like governance structure (e. In particular. the economic potential in this alliance was soon overshadowed by difficulties in coordinating the three culturally very distinctive firms. Alliances often face a situation in which coordination difficulties offset even strong economic focuses on some of the process-related conditions that affect rivalry and managerial complexity differentially over time as the cooperation continues between partners. The first-order condition for successful alliances is the presence of complementary benefits for both partners. Even if the partners in a competitive alliance can design a mechanism to govern possible opportunistic hazards.It is thus possible that alliances can overcome problems resulting from organizational dissimilarities by adopting a proper governance mechanism. only low-quality or insufficient information will be transferred in competitive alliances. alliance partners can prevent these problems by adopting a tightly specified governance structure. The alliance among IBM. Once an alliance is formed based on partners' economic interests. This lack of trust impedes the exchange of firm-specific assets to accomplish collective goals. ORGANIZATION SCIENCE/Vo1. In the following section. However. causing the failure of the alliance (Akerlof 1970). We thus view the management of managerial and organizational dissimilarities as a second-order condition for managing successful alliances. and eventually dishonest activities will drive honest activities out of the alliances. and they are nothing more than a temporary arrangement for interfirmtransactions. the alliance becomes more sustainable as they can better coordinate their efforts to overcome managerial complexity and reduce coordination costs. poses a serious threatto alliance success in that it is difficult to build a trust-based relationship. No. such as licensing and other types of nonequity relationships. These are similar to the type of intermediate governance structures Williamson (1991) referred to as a highly unstable form of governance structure. equity alliances). joint ventures).

Changes in the External Environment. January-February2001 . and ex post. particularly in the context of parent-firm relationships. In Situ Conditions What are the dynamics that characterize possible movements among the different types of alliances? In situ conditions relate to those that affect rivalry and managerial complexity within the course of an alliance. because their strategic interests and cooperative roles change over time. Volatile conditions also lead to vulnerabilities within an alliance. Ex Ante Conditions Ex ante conditions refer to prevailing conditions at the time of the formation of an alliance. under which coordination costs occur. 1. This is consistent with others who have emphasized industry and Figure 2 The Dynamics of Erosion and Failure of Strategic Alliances Ex Ante Conditions (InterfirnRivalry) Directcompetition Complementarity considerations Equity Perceptions endgane of Ex Ante Conditions (Managerial Complexity) Cultural incongruities Agencyissues structures Facilitating It Situ Conditions in environmi-ent Changes external of contributions Perceptions balanced Pace of bilateral learning Asymmetry in Changes strategic positioning Ex Post Conditions Trtist Equity Perceived benefits Alliance Failure I 48 12. that influence cooperative and competitive behaviors within an alliance.g. there are a number of conditions. market and hierarchy. Empirical evidence indicates that the failure rate of equity alliances is nonmonotonic. No. and that explain how alliances might transformover time into different types discussed earlier. rising in early years. As developed in earlier sections. Each stage of cooperation provides a receptive context for the initiation and evolution of economic exchanges in the following stage. In a fundamental sense. complementarity (partners that are well matched in terms of their contributions are more likely to engage in cooperative behavior). The survival of strategic alliances hinges on their adaptive capabilities to such dynamic changes over time. We noted two conditions that influence competitive and cooperative behavior: cultural incongruities (differences in corporateculture and internalpolitics create high coordination costs in an alliance) and agency issues (agency problems also occur because alliance managers have different attitudes on risk than those of the parent organization). Strategic alliances are formed with expectations of success and complementary economic benefits. ex ante conditions cover structuring agreements that arise from the need for coordination. In addition to rivalry. In our view. For the most part. UNGSON InterfirmRivalry and Managerial Complexity Toward a Process Theory of Alliance Erosion and Failure What would make a cooperative alliance more competitive (and vice versa)? In our view. ex ante. the pace of bilateral learning. Each stage of alliance evolution also runs through a cyclical process of negotiation. these conditions are process related and strongly influence development of the alliance. these conditions influence the structureof the alliance and can predispose partners toward competitive or cooperative behavior. and asymmetric dependencies. and the perceptions of endgames (partners who recognize the downfalls of cheating will be less likely to engage in opportunisticbehavior). alliance partnersbegin to reassess the overall values of the alliance in comparison with other types of governance arrangements. At each stage. and execution according to the partners'evaluation of the efficiency and effectiveness of the alliances (Ring and Van de Ven 1994). in situ. The extent to which strategic alliances are affected by competitive rivalry and managerial complexity changes over time as resource exchanges and social interaction continue between partners. four interrelatedfactors are salient at this stage: changes in the external environment. ORGANIZATION SCIENCE/Vo1. These conditions are illustrated in Figure 2..SEUNG HO PARK AND GERARDO R. commitment. these conditions include the nature of competition (direct competitors are more likely to engage in future competitive behavior). but then declining after reaching a peak three or four years into the operation (Park and Russo 1996). Cooperative dynamics in a stage builds a historical context that affects the nature of cooperation in subsequent stages.e. as these affect the partners' competitive positions. perceptions of balanced contributions.

changes in the external environment become a less significant factor for alliance failure unless changes are adverse and revolutionary. 1. and will take full account of foreign competition and potential procompetitive efficiencies. partners may attempt to reduce their work effort.e. that is. Such illegitimate ventures are merely shams to mask cartel behavior and would face legal constraints as a serious external threat to their long-term survival. The National Cooperative Research Act of 1984 allows joint R&D to obtain partial or full immunity from triple damage suits threatening the maintenance of the ventures. But even with the best intentions.S. and knowledge needs. Hamel (1991. the asymmetry in learning and the subsequent asymmetric dependence between partnerslead to alliance failure. Pace of Bilateral Learning. market access needs. The changes in the U. The investment of both time and resources provides incentives for parties to honor the terms of the contract.. particularly joint production ventures. anticompetitive ventures are normally blocked by government agencies as illegal operations. The perceptions of equity in a cooperative relationship are a critical factor to stabilize the cooperative structure. human resource needs. Strategic alliances provide an important learning mechanism for other firms' firm-specific skills. because monitoring is also costly and difficult. American partners. in the process of negotiation. Kogut 1988). slackened demand for the product.S. 1989). Many foreign firms also start out in Japan through joint ventures. and Japanese firms (Hamel et al.but to internal factors. 88) concluded that "in a narrow sense managers saw collaboration as a race to learn.. MNCs and local partners reached a stalement and broke up once the local partners developed the capabilities to take charge of the alliance operation. the complexity of the alliance allows the parties to pursue disparate goals and creates the need for monitoring activities.g. changes in the external environment can change the market positions of alliance partners. can in fact be anticompetitive in terms of price fixing and bid rigging.S.thereby triggering more competitive or cooperative activities aimed at restoring or improving prealliance market positions.g. the venture fails even before its operation gets off the ground.. such as changing economic conditions. In other words. January-February2001 49 . or changes in technological structure. and its survival depends mainly on the partners' behavioral and managerial dispositions. UNGSON InterfirmRivalry and Managerial Conmplexity environmental factors as the major reasons why organizations fail (e. including ventures among competitors.S. easy to learn about (see Hamel et al. but they soon terminate these ventures once they feel confident enough to set up their own sales networks. or why specific alliances are prone to failure (e. there is mounting evidence that alliance failure is not so much due to external factors. Learning is determined by the propensity or desire for one partner (firm) to learn the core skills of another and the degree to which partners are "transparent". legislation have reduced the likelihood of antitrustliability in recent learn more quickly the core skills of its partner. One serious concern for students in economics would be the anticompetitive issue of interfirm collaboration (Berg and Friedman 1980)." Failed joint ventures. It is also possible that changes in a s partner' competitive motives and strategic positions cause the other party's contribution less significant over time. can be traced to the ability of one of the partners. No. An explanation is that once firms invest dedicated assets in an alliance. The Perceptions of Balanced Contributions. assets. In short. American firms have been known to be more "transparent" about their work and attitudes compared to their Japanese or Korean counterparts.SEUNG HO PARK AND GERARDO R. such as behavioral and managerial problems (Parkhe 1993b). Dymsza (1988) illustrated that international alliances between U. ORGANIZATION SCIENCE/Vo1.Alliances provide access to the other firms' proprietaryknow-how. but in a broader sense they saw it as a race to remain 'attractive' to their partners. particularly in the case of Japanese and American firms. Unless a venture is a disguise by a cartel to exercise market power and raise prices to consumers. opposition of government agencies. if not obsolete. However.if an alliance is anticompetitive. Maintaining an alliance that does not offer significant complementary benefits to the partners generates unnecessary costs. However. This asymmetry is often cited as a primaryreason for alliance failure between U. Perhaps the key process variable in managing an alliance is the difference in learning capability and strategic intent for learning between the partners. Hannan and Freeman 1977). The U. 12. The raison d'etat for alliances are complementary benefits that accrue to participatingpartners.g. Porter and Fuller (1985) argued that an alliance is stable for as long as contributions by each partner are perceived to be balanced and equitable.. Furthermore.g. the balance of contributions is perceived to be equitable provided that there are sufficient monitors for partners to make these assessments. The dynamic changes in the compatibility of partners' contributions also affect the partners' bargaining positions during the course of collaboration. 1989). Based on in-depth case studies. government and political needs. However. However. p.e. it is safe from legal challenges.. Japanese partners. government also does not intend to condenm presumptively joint production ventures. Some alliances.

dependencies between alliance partners develop. even though the alliance becomes less marketlike in its design and governance. Doz (1988) argued that parochial subunit goals and corporatepolitics within top management could erode any teamwork. in situ. equity. There is a higher level of integration between partners. January-February 2001 . however.. understanding. When partnersrealize a gap in performance from their historical comparison of actual to expected value creation. and expected consequences are grounds for human choices. Earlier we postulated that trust and commitment could mitigate competitive rivalry and managerial complexity. Because purposes.e. 12. and Ericsson Telephone of Sweden were all phased out. Vulnerabilities created by this situation lead to "hostage situations": The more dependent partnermay face a small number bargaining situation that is held up by the other party. process-based trust. substantially lowering managerial complexity and coordination costs. 1989). commitment. partners' perceived level of the alliance's and the partners' value.SEUNG HO PARK AND GERARDO R. or leave the alliance altogether.e. interpartnerrelationships and skills. NEC of Japan. each partnerengages in redefinition of the alliance and initiates a new loop of negotiation. they decide to terminate the cooperative relationships unless they emphasize joint value maximization supported by strong relational norms that might have developed over time. where the need for collaboration is more acute. The initial role relationships and expectations become socially embedded throughrepeated interactions over time (Ring and Van de Ven 1994). No. and the attachment between partners. However. partnerspursue joint searches for satisfactory outcomes to conflicting situations and unsatisfactory results of the alliances (Zajac and Olsen 1993). However. Because the survival of the disadvantaged partner depends on overall alliance performance. For example. i. At the end of each collaborative cycle. Strategic alliances are also vulnerable to shifts in internal politics. middle managers and staff in an alliance are often divided into these rival camps. Difficulties within the top management team. it is still affected by competitive spirit (like market transactions) between partners. and tolerance of rivalry. or the sequence of learning-reevaluation-readjustmentin cooperative relationships. as well as to wavering support by parent organizations. the disadvantaged party may reveal more and more of its proprietary know-how to maintain its initial attractiveness. This may in turn engender opportunistic behaviors from the advantaged party. one partnermay be more dependent on the other (Hamel et al. The payoffs from strategic 50 ORGANIZATION SCIENCE/Vo1. a stronger form of trust. Seabright et al. Each of the looping sequences of negotiation. starts to replace the initial characteristic-based trust (Zucker 1986). values. It is imperative to maintain mutually beneficial rewards for the survival of an alliance. the alliance improves its repository of knowledge assets. Sometimes what counts goes beyond the actual contributions made by each partner and the profits and other benefits obtained by each one. and ex post conditions. Partly as a response. In claiming and distributing the value created by the strategic alliance. is assessed in terms of efficiency and equity. while Honeywell was going throughcorporaterestructuringin 1986. UNGSON Interfirmn Rivalry and Managerial Complexity Asymmetry.The disadvantagedpartner may initiate renegotiation of contractual terms to maintain equal or more control over the alliance. the decreases in its exchange partner's provisions. In this section. Even more important is what the partners perceive over the whole life of the operation. i. Over time. relative to other types of governance structureslike market or hierarchy and other potential partners. it is expected that continuation of an alliance will depend on such assessments. it may become even more vulnerable to actions taken by the dominant partner. partnersmay experience conflict when they perceive divergence of interests. As partners develop mutual understandingof each other over time. and execution stages. These enhanced interfirmties. and goal attainment. we discuss how trust emerges as a result of ex ante. Strategic alliances become institutionalized and take on more hierarchical characteristics (Parkhe 1993b). can create wide cultural gaps and poor communications at the level of middle management. become offset as changes occur in resource fit between partnersover time. Strategic alliances fail when one or both partners perceive unfair treatment or an unsatisfactory ratio between compensation and contribution from the alliances. commitment. or the increases in the opportunity set. the alliances with Machines Bull of France. and execution of cooperation. and the alliance then becomes more dependent on informal measures than it was in the earlier stages. (1992) maintain that resource fit deteriorates over time when there is a reduction in partners' ability to satisfy resource requirements because of the increases in a partner's resource requirements. in turn. 1. To the extent that asymmetries in contributions occur. Ex Post Conditions Ex post conditions relate to outcomes arising from partners' assessments of efficiency. If partners manage to build social norms for joint value maximization.may change at this stage. Strategic alliances are subject to environmental as well as internal changes that are derivative changes of parent firms' management structure or strategic interests. As the interaction between partners continues. and social control appears as a primarygovernance mechanism. Accordingly..

Japanese managers view formality and the use of third-partymanagement to control an alliance as signs of mutual distrust. perceptions of balanced contributions. While trust and commitment provide countervailing effects for alliance stability. success in an alliance is now regarded as an exception rather than a rule. It also helps partners overcome conflicting situations and unexpected difficulties. or alliance performance in general. Over time. To conclude. institutional legitimacy. while the perception of injustice initiates a negative feedback. as well as to exploit firm-specific competencies or reduce environmental uncertainty (Eisenhardt and Schoonhoven 1996). whether empirical or theoretical. we contend that this paper serves as a first step toward deepening our understandingof alliance failure and developing a general theory of alliance failure with well-defined and tested boundary conditions. 1. This paper presents a theoretical framework that integrates these multiple explanations of alliance failure by focusing on interfirm rivalry and managerial complexity. and managerial difficulties in implementing the cooperative relationships. January-February2001 51 . When these costs become insurmountable. These strategies match forbearance with forbearance but punish cheating. and ex post conditions. Conclusions Strategic alliances have become an essential element in recent corporate strategy. Strategic alliances help firms gain marketpower and access. seemed to have adopted contingency approaches focusing on a series of interactive and structural variables to explain alliance failure. Strategic alliances also have become a powerful force in shaping a firm's global strategy. but using the opportunityto build and test trust. leading to eventual failure of the alliance. Despite these purportedbenefits. they can be built only over time. more complex than competitive. The best and least costly mode of governance for an alliance would be trust and mutual commitment. is partially the result of a lack of theoretical framework that could offer a direction for furtherstudies. No. and their ability to implement the cooperative structure. partner behaviors become path-dependent. or relatively noncompetitive and ORGANIZATION SCIENCE/Vo1. authors suggested "tit-for-tat" and "mutual forbearance" as strategies to develop trust and commitment (Buckley and Casson 1988). and asymmetric dependencies are key process variables that influence whether alliances remain highly competitive and complex. We believe that these two dimensions could be the logical foundations to understand alliance failure that have been addressed so far in the literature. Studies show that even though no violations of trust were found. one partner's forbearance or credible commitment at a stage gives rise to a positive feedback over time. In fact.but there will be decelerating commitment as they begin to note any sign of mistrust or lack of commitment from the other parties. In this regard.We also believe that the recent slowdown of studies on alliance failure. in particular. Therefore. there will be escalating commitment as the alliances meet the partners' individual goals and outcomes are perceived to be fairly distributed. Taken collectively. A review of the alliance literature reveals an extensive list of reasons for entering an alliance. while Japanese managers prefer mutual discussion and mediation to formal contracts. Generally. strategic alliances were demised to decline or dissolve due to changes in competitive conditions and strategic direction.heavy reliance on a partner and the exchange of proprietary information represented major risks (Larson 1992). Transaction parties become aware of the relevant party's reputationon trustthrough consulting their own experience and/orfrom the experience of others (Gulati 1999). strategic alliances entail serious competitive risks. UNGSON Inteifirm Rivalry and MancagerialComtplexity alliances may change over time. this study presents a conceptual model of alliance failure based on rivalry and managerial complexity in an alliance that affects partners' strategic interests and motivation to cooperate (or compete). altering incentive structures for partners." and it can be extended to an organization with a reputation for trustworthiness (Ring and Van de Ven 1994). expecting other partnersto reciprocate.We further illustrate that the operation of rivalry and managerial complexity in an alliance is a dynamic function of the interplay among ex ante. Although several studies attempted to explore the potential sources of alliance failure. The high failure rates documented in the literature indicate that strategic alliances are more likely to fail than to succeed. As one popular resolution to the prisoner's dilemma game. Doz (1996) suggests that partnersin successful alliances were willing to make irreversible commitments first. trust emerges based on ''norms of equity. they do not evolve overnight and seldom come easily. These stages of development occur as a repetitive sequence in assessing each partner's contributions. 12. more competitive than complex. Changes in external environment. A Japanese executive involved in an alliance commented that a partnershipworks on the basis of trust and commitment or not at all (Business Week 1986). Previous studies. in situ. the field still remains without a comprehensive theoretical framework. and new competencies. Mutual trust in an alliance reduces interaction and minimizes bureaucratic complexity. opportunism leads to an asymmetric bargaining position and the dissipation of firm-specific assets. the pace of bilateral learning. the alliance may not succeed. American managers normally refer to formal contracts to avoid conflicts and uncertainties.SEUNG HO PARK AND GERARDO R.

Collaborating to frontier: assessing E.SuffolkUniveragreements. Acknowledgments The authorsare grateful to Arvind Parkhe. Res. Contractor P. The marketfor "lemons": Qualityuncertainty Quart. In fact.1993. J. It is hoped that this may be used as one guide in redirecting future studies of alliances.. A. Antiacquisition parent activity: Knowledge 25 trust Bull. Rev. MA. Studies have so far been limited to static explanations of contingency factors of alliance failure. These multiple indicators of outcome measures that have been used in previous studies are not necessarily accommodating to each other. and assessment of efficiency of the alliance as an alternative governance structure. The Functions of the Executive.Michael Gordon. For this reason.T. V. they could explore only the beginning and the end of a cooperative alliance. Humanresourcessystemsin an international alliance:The undoingof a done deal? Organ. alliance vs.1991.cultural and learning. J. more learning about the other may help promote trust.Asia Pacific J. New York. M. Threeperspectives appropriation ardsin cooperative Workingpaper.G. barriers. Bell. it would be more desirable to focus on a clearly defined concept of alliance failure to develop a theoretically and methodologically coherent study. emerge as an adaptive mechanism to market uncertainty. performance. 1990.1996. Press. and MA. As illustrated earlier. and how they manage ongoing conflicts due to man- agerial and organizational dissimilarities. sity. Dy19 nam. (Winter) 63-74.It is thus critical to adopt a dynamic perspective and historical observations of cooperative processes. Oddcouples. Reed.(July21) 100-106.L. Joint venturesin LDCs:Partner Management Internat. 1987. 1991. like other organizational forms. J. because they will undoubtedly face competitors that cooperate with each other.. but not the cooperative process in the mid-life of alliances (Yan and Zeng 1999). 17 151-166. Causesand effects of joint venture The vs. Bleeke. the outcomes and their predictors in an alliance vary according to the operational definition of alliance failure.P. although they may explain some form of alliance failure. Lorange. (Spring) 143-168. process-oriented approaches to study alliance failure (Koza and Lewin 1998. 1986. the proposed framework illuminates the factors that can improve management of strategic alliances. S. Y. as opposed to alliance failure. studies may focus on multiple measures as long as they refer to the same level of analysis. UNGSON InterfirmRivalry and Managerial Complexity complex. J. LexingtonBooks.1988. References Akerlof. Univ.P. F.1980. 84 488-500. or. Another critical issue in future research is to follow dynamic. (Winter)19-30. as well as the dynamics that influence their development. predictors of one party's success often indicate failure of the alliance as a governance structure.e.. These variables also lead to pathological tendencies.Mike Russo. Berg. Business Week. Sloan Management Rev.R. with jointventures A. In Cooperative Strategies in Inter- 52 SCIENCE/VOl. Friedman. D.SEUNG HO PARK AND GERARDO R. Alliance failure is an outcome of this coevolutionary adjustmentto changes in the market. partner levels. M. Koza and Lewin advocated the importance of adopting a coevolutionary perspective to study strategic alliances. 1968. how they react to divergent economic interests to avoid potential appropriationhazards. Harvard C.Japanese Synthesizingthe economicand cultural westernmultinationals: of explanations failure. Another promising area for future studies is to dissect and make comparisons of determinants of alliance failure across various stages of alliance life cycle. It would be interesting to study how partners'opportunistic tendencies evolve over time. 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