Interfirm collaboration in global competition, The

interfirm collaboration in global competition, The

Park, Seung Ho

This paper presents a theoretical framework to explain why firms move away from outright competition to cooperation in international operations. The first section discusses economic and organizational impetuses for the interfirm collaboration that result from the changes in international political economy, competitive structure, technology, and organizational operation. In the following section, I introduce a theoretical model of alliance formation according to transaction cost economics.

INTRODUCTION

Unprecedented changes in the world economy and technology during the last two decades have spurred an interest in various forms of interorganizational collaboration. However, many firms, particularly large firms, have traditionally considered strategic alliances with reluctance, finding them a second-best option and less preferable than independent competition in the market [Contractor & Lorange 1988]. Historically, the research in strategic management has treated organizations as focal units competing among themselves for “survival of the fittest.” Accordingly, conceptual models emphasize competitive strategy, and strategic choices are predicated on independent actions taken to promote self-interest. Interorganizational relationships were viewed as competitive and antagonistic with little concern about interfirm collaboration [Astley 1984].

Taken collectively, the changes in global markets have created a situation where a firm’s competitive situation no longer depends on itself [Hamel, Doz, & Prahalad 1989; Harrigan 1988; Ohmae, 1989]. To fill the whole spectrum of market niches that are necessary in this competitive order, strategic alliances have become an indispensable component of strategy [Business Week 1989]. Strategic alliances are a way of arranging interfirm collaboration to enhance each partner’s competitive competence in the emerging global economy by sharing complementary assets between partners. Within this emerging perspective, strategic alliances [e.g., joint ventures] premised on interorganizational collaboration provide an alternative mode of conduct among competitors. Various studies have indicated that the interfirm collaboration becomes necessary for multinational corporations to compete effectively in globalizing markets because it becomes a vital means to manage environmental turbulence and interdependence [Astley 1984; Bresser & Harl 1986]. Astley [1984] contended that interdependence in modern society has grown to such an extent that organizations have become fused into collective units whose very nature does not permit independent actions. Here collaboration becomes genuine as organizations develop orientations that gradually eliminate competitive antagonism. Figure 1 shows the recent trend of interfirm collaboration using joint ventures, which are the most representative type of strategic alliances, by U.S. multinational corporations. Compared to earlier years, it reflects a drastic increase in the interfirm collaboration during the 80s.

In recent years, strategic alliances have become a mainstay in popular and academic writings, leading to various views on corporate motivations in forming the collaborative relationship. Industrial economics has been a dominant perspective in the traditional context of strategic management [Porter 1981].

Influenced by the structure-conduct-performance perspective, which is the main theme in industrial economics, the corporate strategy has traditionally underscored importance of the strategic fit between a firm’s conduct, such as the way it selects appropriate corporate strategy, and changes of competitive parameters in the market. The primary emphasis in industrial economics is on maintaining high-level competition among firms and discouraging monopolistic consolidation of their market power [Sherer 1980]. Therefore, according to this perspective, competitive survival becomes the essence in formulating a corporate strategy.

However, the traditional competitive view on corporate strategies has become inappropriate in the new competitive orders of global markets. The recent economic and organizational changes have become imperatives that have to be addressed in strategic decision making at the corporate level. The traditional way of thinking on corporate strategies has to be reconsidered to reflect these changes; the collaborative alliance is now an essential mechanism for competitive positioning in the market.

In recent years, scholars have presented various views to explain the reasons for strategic alliances, but the field is still in need of a comprehensive theoretical framework to enhance our understanding of alliance strategies. Based on a review of the conceptual and empirical evidence in the literature, this paper presents a comprehensive framework of economic and organizational imperatives leading to alliance formation. The framework considers changes in the international political economy, the industrylevel competitive structure, the modern technological structure, and the organizational operation. Then, in the following section we employ transaction cost economics to develop a theoretical model of alliance formation.

ECONOMIC AND ORGANIZATIONAL IMPETUS FOR STRATEGIC ALLIANCES

Changes in International Political Economy

Intense worldwide competition. The international economic environment experienced drastic changes during the last two decades. Fierce cost wars, slow market growth, decline of productivity, and increasing protectionism compelled firms to go international. Recently, competitive pressures have intensified in global markets. In particular, U.S. firms have been threatened by the entry of foreign firms into international markets formerly held by U.S. firms. Also, U.S. firms have recently faced a different kind of market competition characterized by the collective industry structures adopted by competitor nations. Under the new system, foreign competitors pursue long-term, large-scale joint operations, which have not been possible for U.S. firms because of strong federal antitrust legislation.

Increasing protection and political intervention. The recession in the late 70s and early 80s resulted in a stagnant growth and a decline in demand. Eventually, firms had to accept a smaller market share, and confront an accelerating cost war [Devlin & Bleakley 1988]. The changes have provided a setting that makes it difficult for firms to maintain sufficient profitability and that forces the firms to search for new international markets. On the other hand, the governments of competitor nations increased their presence in business operations to protect their own saturated domestic markets, which also incurred collective responses to the global competition. The new legislation enacted a growing number of rules and regulations that became social constraints in most advanced societies; also the costs of regulatory compliance rose significantly, adding to the expense spiral already going on. It is now widely believed that companies form strategic alliances to bypass the local political barriers and to be present in the main global markets [Devlin & Bleakly 1988; Parkhe 1993].

Institutional responses to global competition. Competitive threats from foreign competitors, particularly Japan and other developing states, have recently become a major challenge to American and European firms in international competition. The new challenge has motivated American and European societies to reevaluate their institutions, policies, and ideology [Jorde & Teece 1989]. Particularly, in the hightechnology area Japan and other Pacific countries have emerged as major players, dislodging U.S. firms from their preeminent position. European countries are also losing their competitive strength: European firms’ share of world integrated circuit production fell to 9.7% in 1988, down from 16% in 1978. This new challenge has spurred various constituencies in Europe and the United States to insist on an aggressive catch-up and stay-up policy to respond to the foreign competition backed by institutional and industry clusters.

Ungson [1990] recently contended that the key reason for the failure of U.S. high-tech firms to sustain competitive advantages during the 1980s was the inability to develop institutions to support their strategies. Ouchi and Bolton [1988, p 12] also argued that “a society which fails to fully provide the help for the creation of multi-firm industry collaboratives will suffer in global competition with a society which is more completely equipped with a range of institutional forms.” The underlying industry structure in Japan obviously differs from the U.S. industry structure. The ownership of Japanese firms is more often linked to other corporations, financial institutions, or insurance companies. Also, there exists an industry wide collective structure, allowing firms to share information, standardize procedures, and present a unified front to government agencies [Gerlach 1987]. While the U.S. microelectronics industry was losing competitive strength because of its fragmented structure [Jorde & Teece 1989], Japan countered by organizing large-scale research consortia, such as the VLSI Technology Research Association.

Recently, the initiation of institutional responses to the global competition has drawn lots of attention in the United States and Europe. As a reply to the Japanese challenges in the high-tech area, the U.S. government adopted a legislation in 1984 to encourage joint researches, The National Cooperative Research Act, and it also has been trying to adopt a similar legislation for joint production activities. The legislative changes in the United States have resulted in a string of consortia, such as MCC (Microelectronics and Computer Technology Corporation) and Sematech (Semiconductor Manufacturing Technology). EC and European firms and governments were also planning to funnel as much as $16 billion during the first half of the 1990s to cooperative activities [Business Week 1989].

Insufficient innovation at the macro level.

Another critical phenomenon in recent political economy is weak appropriability of intellectual (leaky) property, which makes it difficult to encourage the optimal level of innovation [Ouchi & Bolton 1988]. The traditional mechanisms to protect intellectual property–such as patents, know-how, and first mover advantage–failed to provide enough protection to innovators, leading to the failure of the innovation market. In this market setting, firms are reluctant and incapable of pursuing innovations due to several reasons, such as dispersed sources of innovation (geographically and organizationally), easy and common imitation, public availability of scientific know-how and new product concepts, and low-cost travel and communications [Jorde & Teece 1989]. Moreover, spiraling R&D costs, which are too high even for the biggest companies, also add to the lack of innovation [Business Week 1989]. Experiencing these changes, the interfirm collaboration has become an imperative for U.S. firms to maintain their competitive stance in international markets [Evan & Olk 1990; Jorde & Teece 1989; Ouchi & Nueno 1988].

Changes in Industry-Level Competitive Structure

Market maturity and diversity of consumer demand. The driving forces that changed the international political economy also had a significant impact on the industry-level competitive structure. Child [1987] pointed out that a major challenge facing large firms in the recent competitive setting stems from the demand risk such as fluctuating demand or the collapse of markets. In particular, the recent economic structure filled with maturing and saturated industries has worsened threats from the demand risk. In addition to the changes in the global economy, diverse consumer tastes also became a significant factor in the industry-level competitive dynamics in recent years [Child 1987; Powell 1990]. The fluctuation and diversity of consumer taste caused the dissolution of mass markets for many standardized products. This was a blow to what was a dominant economic principle until the early 1970s. The breakup of mass markets eventually led to the decline of productivity and slower growth [Powell 1990]. Firms with a heavy and narrow commitment in an industry became vulnerable to the drastic changes in the competitive structure [Child 1987]. Moreover, growing competitiveness forced firms to be more sensitive to the changing consumer tastes, particularly in fashion and customized products, ranging from automobiles to computer software [Child 1987].

Shortened product life cycle. The short product life cycle, the excess capacity due to market maturity, and the high demand risk led firms to search for new market strategies in order to survive and maintain growth. New market strategies require operational flexibility and technological sophistication to respond to the dynamic changes in the competitive markets. The main concerns in strategic adaptation were product rationalization, access to a large market, and competitive repositioning. These driving forces behind the changes in the industry-level competitive structure have become the basis for alliance formation [Child 1987; Devlin & Bleakley 1988].

Firms need to achieve product realization through economies of scale and learning-bydoing to maintain high productivity [Contractor & Lorange 1988; Marity & Smiley 1983]. By transferring production of components or subassemblies to locations with cost advantages, economies of scale can be further enhanced [Contractor & Lorange 1988]. Also, shortened product life cycles prompt firms to pursue an immediate access to large markets. The creation of a larger customer base improves the viability of R&D investment and lowers its risks.

With this new industry setting of high demand risk and unstable industry boundaries, firms need to redefine their market boundaries. Moreover, they should be consistently aware of the dynamic changes of competitive parameters in the market to maintain their competitive posture. Strategic alliances can be an effective strategic weapon to respond to these changes in the industry-level competitive structure. At the industry level, strategic alliances help reduce the number of competitors that split the given market, affect the entry of firms into the venture’s market place, and develop common technical standards and product configurations [Hladik 1988]. Therefore, firms can affect competitors’ cost structure and competitive behaviors by developing the collaborative governance such as strategic alliances. However, the corporate diversification through innovations or mergers/ acquisitions lacks flexibility to respond to the fast changes in competitive dynamics. Moreover, the internalized expansion lacks product rationalization, i.e., too small scale of operation, because of fragmented, insufficient, and unstable demand.

Changes in Modern Technological Structure

Importance of speed and information

In the recent history, technology has become a major factor affecting interfirm competitiveness. The changes in modern technology altered the firm’s capability in responding to the changes of competitive structure and created new rivalry situation within industries. Moreover, recent technological changes have made the traditional view of product life cycle obsolete. The traditional product life cycle foresees the sequential moves taken by a technology innovator to exploit the fruits of technological inventions; starting with exports, then establishing foreign subsidiaries in developed countries, and finally initiating foreign subsidiaries in developing countries [Vernon 1966]. Nowadays, prior developing countries and other major U.S. competitors have become important sources of new technology; the technological gap has become minimal and bargaining power flows equally in a bilateral way. Clark [1989: 94] views modern technological structure as a paradox, i.e., “technology has never been more important; yet building a competitive advantage has never been more difficult.”

The changes in modern technology can be characterized by the rapid pace of technological development and innovation, the ever-increasing high costs and high risks of R&D, shorter product life cycles, the fast worldwide dissemination of expanding scientific knowledge, and a profusion of sophisticated production processes [Clark 1989; Devlin & Bleakley 1988; Powell 1990]. It has become obvious in recent competitive settings that time is of the essence. In a recent study, Clark [1989] asserted that today companies make history, or are consigned to it, quickly; in many industries, even six months can be packed with moves and countermoves. Products are born, sold, and phased out. Information moves very quickly; customers will not wait; indeed, they will pay a premium for responsiveness.

Imitation and risks of R&D

In the early part of the century, Joseph Schumpeter [1942] presented a scholarly view of the competitive structure in an industry that experiences technological dynamics. His argument was that in capitalist economies the most valuable form of competition is technological innovation. The Schumpeterian system was an effective engine of progress, incorporating the fast pace of technological advance and shifting consumer demands. According to the system, profitable companies and technologically progressive industries can be characterized by strong research and development. One assumption underlying the Schumpeter’s proposition was the secrecy of proprietary technological know-how. However, recently the premium derived from a first invention has become insignificant and unsustainable because of the fast spread of technological knowledge and the short product life cycle. Clark [1989] argued that it is nearly impossible to build a unique and lasting edge; that there is no theoretical limit to excellence in innovation and production; and that there is no permanent advantage to being first. Hladik [1988] introduced other possible risks associated with R&D pursued by a single company. That is, the expected breakthrough from R&D does not occur fast enough, so that it may require more resources than originally expected; market factors may change, reduce, or divert consumer demands during the lead time before the new product, i.e., the outcome of R&D, reaches the consumers; in the process competitors could develop a better product and the R&D firm may not be able to reach the market share to pay off its investment; and rival firms can divide the market such that minimum efficient scale becomes too high and no firm can achieve the economic return on its R&D investment.

Dispersed technological expertise

Today, technological expertise is widely dispersed, and it is impossible even for a very large international company to master all the technologies based on in-house research [Powell 1990]. The level of expertise in once underdeveloped countries is converging with that of developed countries. Clark [1989] proposed that the technological flows among different firms be managed by a new mode of organizational structure and administrative mechanisms such as strategic alliances. Firms can leverage technological development in their own companies through strategic alliances.

The recent technological advances in high-tech industries are also characterized by strong interdependencies [Astley 1984; Nelson 1984]. Nelson [1984] contended that individual technological advances are almost always related intellectually and economically to similar, earlier advances and to other but related technologies.

Technological advances often are linked together because certain products form relatively tightly integrated systems. Integrated circuits are the heart of the modern computer. In a systems technology, an advance in one part of the system may not only permit but require changes in other parts. Thus a computer designed around integrated circuits is a very different machine from one designed around vacuum tubes. Institutionally, this recognized interdependence leads either to the development of companies that design several of the key components themselves or to strong interactions, i.e., contractual, among companies producing different components [Nelson 1984, p. 9].

Nelson’s argument implies that firms need to be plugged in to a wide range of technologies to succeed in modern high-tech industries. The connections between technologies and the high costs and risks involved in R&D are the driving forces in the formation of strategic alliances. The interfirm collaboration is increasingly thought to enhance innovative capabilities of organizations by providing the opportunities for shared learning, transfer of technical knowledge, and resource exchange between independent firms [Nohria & Eccles 1992]. Firms use the interfirm coordination to acquire new technologies and expand their product/market reach. Indeed, innovative technologies or administrative structures are often at the nexus of collective organizational forms.

The strategic alliance is a means to acquire a fast access to outside technologies without the risks and costs described above. Strategic alliances expand the information access by widening the sweep of environmental scanning since the potential for exposure to new technologies or market innovations is enhanced by the number of firms in the network. Managers learn about available strategic options or industry recipes from their exposure to alliance partners, and collective networks provide an informational buffering to member firms, so that they can alter the effects of environmental turbulence. Also, strategic alliances can be a vehicle for combining complementary skills and talents, which are the leading sources for technological advancement in high-technology industries [Hennart 1988; Marity & Smiley 1983]. Strategic alliances can provide a greater access to resources, including capital or equity financing for research and innovation development [Aldrich 1979]. Alliance partners can also share development risks while maintaining some level of propriety and control over the resulting innovation. Furthermore, strategic alliances generate opportunities for acquired learning and knowledge to cross industry and organizational boundaries, allowing multiple firms to offset the cost and time required to develop new products or organizational routines [Hamel, Doz, & Prahalad 1989].

Changes in Organizational Operation

Limitation in large-scale organizations

The recent history has seen an increasing turbulence in the world of organizations. The changes in the global economy, industry structure, and technology have created new competitive environments for organizations. Simultaneously, firms began to adopt a new strategic thinking [Contractor & Lorange 1988]. Some organizational changes occurred as a response to the new settings, and these also led to changes in the outside environment. Organizations had to adjust structures and management systems to effectively implement the new competitive strategies [Miles & Snow 1986].

In the traditional form of hierarchical organizations that emphasize efficiency, the structure and internal systems cannot be easily changed. As Weber [1947] pointed out decades ago, the bureaucracy can be an efficient system only if an organization is located in stable environments. Once established, the bureaucracy is highly resistant to changes. Because of the internal inertia, students of population ecology maintain that organizational mortality is high in highly competitive environments [Hannan & Freeman 1977]. Recently, many authors have pointed out bureaucratic problems in highly integrated organizations that eventually amount to strategic disadvantages, such as reduced flexibility in response to environmental changes, dulled incentives for an individual operating unit, decreased employee satisfaction and commitment, and technological, cultural, and attitudinal rigidities [Porter 1986; Williamson 1985]. Therefore, the challenge facing these authors and managers is to inject managerial flexibility into traditional organizations and avoid the misfit between internal system and new competitive settings [Olleros & MacDonald 1988].

Organizational complexity and the need for flexibility

The recent revolution in high-tech areas inundated organizations with information. With the increasing information, organizational operations have become increasingly complex and easy imitation among competitors made it difficult to distinguish one organization from another. Organizations cannot exploit the virtues of increased information unless they adopt new structures and systems that are compatible with the new setting [Clark 1989]. In response to these new problems, organizations need to create dynamic environments that allow an easy access to the complementary skills and distinctive competencies in other firms [Clark 1989; Child 1987]. Recently, new broad-based organizations that operate beyond the traditional boundaries have emerged. These include suppliers linked to designers, manufacturers to retailers, and R&D teams between international partners. Jarillo [1988] argued that the huge success of Japanese firms was due to their concentration on distinctive competence. This allowed the firms to excel over competitors even as they created linkages with other competitors.

It is better for an organization to ride the dynamics of environmental changes rather than to fight them. Olleros and MacDonald [1988] contended that success is not easy when a firm tries to counteract overwhelming forces in the environment. Strategic alliances appear as a mechanism to respond to the dynamic changes facing organizations. Miles and Snow [1986] suggested that organizations of the twenty first century are likely to be vertically disaggregated; that is, functions typically encompassed within a single organization will instead be performed by independent organizations that have been temporarily brought together by an entrepreneur with the aid of brokers and maintained by a network of contractual ties. Miles and Snow [1986, p. 69] explained that the new organizational form is:

….a far more flexible structure than any of the previous forms, it can accommodate a vast amount of complexity while maximizing specialized competence, and it provides much more effective use of human resources that otherwise have to be accumulated, allocated, and maintained by a single organization.

A THEORY OF ALLIANCE FORMATION

The strategic alliance is an intermediate form of governance structure between the market and the hierarchy. The monocausal approach in the traditional transaction cost paradigm looked only at transaction hazards of the market, focusing on asset specificity as the primary source of transaction costs. Without fully recognizing the presence of bureaucratic costs, the hierarchy was suggested as the answer to market failure. Transaction hazards, however, exist in the market (hold-up problems, measurement costs, and search and enforcement costs) as well as the hierarchy (agency costs, shirking and free riding, measurement costs, and coordination costs). Within an alliance, the principles of both the market and the hierarchy interpenetrate to remedy failures of the two extreme governance mechanisms, i.e., the market and the hierarchy.

As neoclassical economics posits, the market contracting is a superior mode for many transactions because of its production cost advantages. Static scale economies tend to be exhausted by buying rather than making if the firm’s needs are small in relation to the market. Moreover, the market contracting can maintain risk-pooling benefits by aggregating uncorrelated demands and scope economies by supplying a related set of activities of which the firm’s requirements are only one [Williamson 1983]. However, under special circumstances in the market system such as asset specificity, uncertainty, and/or information asymmetry, short-term-oriented opportunistic behaviors replace the principle of market efficiency. As a consequence, the market governance structure fails. The hierarchical governance alone, however, cannot evade the hazards of opportunism; it faces bureaucratic costs such as the agency problem, shirking, and free riding. Furthermore, building competitive advantages in the new global competition requires a high degree of organizational flexibility for firms to be able to adapt to different technological and market needs. The internalized venturing through the hierarchy often leads to rigid organizational settings as described in the previous section. Furthermore, the independent, hierarchical governance structure deters innovations because of its inability to integrate technologies that are widely diffused, and it does not allow collective responses to foreign competitors that built their initial strength through collective efforts in their own domestic markets.

The strategic alliance is a specific type of bilateral governance based on the transactional reciprocity. It can be a device to mitigate the defects leading to failures of the market and the hierarchy. The success in a strategic alliance requires creating dedicated assets from one or both parties. “Dedicated assets are those that are put in place contingent upon particular supply agreements and, should such contracts be prematurely terminated, would result in significant excess capacity [Williamson 1983, p. 526].” Dedicated assets are protected by a reciprocal long-term exchange agreement; for example, firm A (e.g., a buyer) makes a specialized commitment conditioned that firm B (e.g., a seller) guarantees similar type of commitment. “Credible commitment” from firm A, through its dedicated investment, signals its bearance of collective goal; but, this does not lead to a unilateral holdup situation by firm B because the buyer (firm A) would leave the supplier with large excess of capacity by prematurely terminating the contract, which could be disposed of only at distressed prices [Williamson 1983]. Reciprocal trading in an alliance provides mutual safeguards against transaction hazards by creating a mutual hostage situation. Therefore, the strategic alliance can overcome the risks arising from opportunism, discourage the pursuit of subgoals through superior monitoring mechanisms, and align incentives to reveal information, share technologies, and guarantee performance [Kogut 1988]. The strategic alliance can incorporate long-term reciprocity while maintaining the benefit of market contracting, such as economies of scale [Hennart 1988]. For example, the reason most recent bauxite mines and alumina refineries are built by consortia of aluminum producers is to achieve economies of scale, while avoiding the risk of a holdup situation, which otherwise would not be possible because of the high minimum efficient scale.

However, it needs to be noted here that after two decades of research on strategic alliances, what constitutes the success/failure still remains as a troubling definitional question. There are many different types of strategic alliances where success is defined different ways. For example, if a partner’s intent in the cooperative alliance is to learn the other partners’ firm-specific knowhow, dissolution of the alliance is regarded as success for the partner once it has learned whatever it wanted. A review of prior studies indicates a proliferation of performance measures; researchers have used both objective (i.e., termination, duration, financial gains, etc.) and subjective (i.e., goal attainment, satisfaction, etc.) measures. Such proliferation has confounded the difficulties of understanding alliance activities. Ironically, Anderson [1990] indicated that managers also appear uncertain of how to evaluation performance of joint ventures. However, recently many scholars have attested the significance of long term reciprocity between partners in relation with the success/failure of alliances. The dedicated investment in an alliance involves not only economic and technological resources, but also social commitments and entanglements of individual partners. Therefore, it is both in the economic and in the psychological best interests of the parties to preserve the socially embedded relationship [Ring & Ven de Ven 1994]. For this reason, the long-term reciprocity, based on each partner’s dedicated assets, makes strategic alliances an efficient governance structure discouraging opportunistic behaviors from the partners.

The strategic alliance also reduces information costs and accelerate technological innovation. The spot contracting in the market leaves little opportunity for accumulation of common information between parties, creating high information costs. This lack of information can lead to high transaction costs due to the tenuous renegotiation process at each transaction [Imai & Itami 1984]. For example, in high technology industries where the learning-by-doing process is an important competitive factor, technological operations require continuous improvement in know-how and software. Since the transaction partners are replaced so often in market relationships, however, these industries cannot maintain the learning process. Whenever the parties in market transactions are changed, learning along the experience curve decreases, creating high search and negotiation costs.

Moreover, in market transactions the technological innovation is not easy due to lack of an externality effect for innovation across different companies. Nowadays, many innovations are the result of the combination of several existing pieces of information [Imai & Itami 1984]. Strategic alliances can provide a mechanism to integrate the valuable pieces of information held by each party. Information is much less useful when it is isolated by a market mechanism. A hierarchical governance structure becomes inefficient because it is impossible, or extremely costly and risky, for firms to be equipped with every piece of relevant information for modern technological innovations [Hladik 1988; Child 1987]. The lack of information in a spot contracting leads to market failure. On the other hand, information accumulation within an organization may create rigidity, which eventually leads to misfit with the environmental dynamics and inefficient operation, particularly in high-tech industries [Imai and Itami 1984]. Furthermore, managing the whole spectrum of value-creating activities within a firm operating in the global setting leads to substantial bureaucratic costs due to coordination difficulties and operational complexity. In their comparative study of Japanese and U.S. organizations, Imai and Itami [1984, p. 300] found that:

information accumulation becomes rigid because membership of the transactions would be slow to change (due to severance costs of these members), and potential variety of accumulated information could be limited (or at least not widely available as in the outside market) because of limited membership.

In summary, firms are able to maintain operational flexibility and overcome lack of information accumulation by creating strategic alliances with other firms, such as joint R&D alliances or consortia. It is easier, faster, and less costly to approach relevant information through an alliance than through internal growth, while overcoming the problems due to changes in global political economy, industry-level competitive structure, modern technological structure, and organizational operations.

CONCLUSION AND FUTURE RESEARCH DIRECTION

This paper posits that organizations have experienced drastic changes at every level of task environment that make the traditional corporate strategy perspective inappropriate. The changes in the international political economy, industry-level competitive structure, and modern technological structure have created a new competitive setting and affected corporate behaviors. The globalization of industries has led to smaller world markets. The drastic shifts in technology have blurred industry boundaries and created multiple levels of interdependence in production and marketing operations, which have fostered the need for cooperation. The intense competition caused by slow growth in the world market, decline of productivity, and shorter product life cycle has led to severe cost wars, and it has depleted firm profits. Rapid innovations and technological changes also have shortened product life cycles. Advances in communications have facilitated information flows and eliminated slack and lead times in diffusing innovations.

In the new global setting of hypercompetition, the market and the hierarchy have lost their efficacy as an effective transactional mechanism. Failures of the market and the hierarchy have led to the creation of strategic alliances as an intermediate governance structure to mitigate the transaction problems in the market and the hierarchy. Strategic alliances are able to avoid the transactional hazards present in the market and the hierarchy by creating a mutual hostage situation and by utilizing alliance-specific dedicated assets.

This study addresses the importance of strategic alliances as an alternative mode of corporate strategy. As a response to the changes explained above, strategic alliances have been deemed necessary by many U.S. firms during the last decade. However, recent empirical evidences indicate that failures abound in any type of interfirm collaboration [Harrigan 1988; Park & Russo forthcoming]. Some authors argue that successful alliances have become exceptions, rather than the rule [Harrigan 1988]. Therefore, future studies need to reevaluate the efficacy of this new mode of corporate strategy, i.e., strategic alliances, and determine how effectively strategic alliances have met the needs raised by the changes in various levels as summarized in the fist half of this paper. Future studies also need to delineate the factors that improve the management of alliances and affect the success/failure of strategic alliances.

The problems in managing strategic alliances are not intractable.If managers have good understandings about the factors that affect the success/failure of alliances, strategic alliances can be used as an effective strategic weapon in the new competitive order of the global market. As Harrigan [1988] warned, firms should understand the strategic impacts of alliances whether they join an alliance or not since they will undoubtedly face competitors which cooperate each other.

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