Partner analysis and alliance performance

Transcription

1 SCANDINAVIAN JOURNAL OF Management Scand. J. Mgmt. 19 (2003) Partner analysis and alliance performance T.K. Das a, *, Bing-Sheng Teng b a Department of Management, Zicklin School of Business, Baruch College, City University of New York, One Bernard Baruch Way, Box B9-240, New York, NY 10010, USA b Department of Strategic Management & Public Policy, School of Business and Public Management, George Washington University, 2115 G Street, NW, Washington, DC 20052, USA Received 1 December 2001; accepted 1 November 2002 Abstract The determinants of strategic alliance performance have not been explored adequately in the literature. Empirical studies abound with numerous kinds of performance measures but, thus far, there is no coherent theoretical basis for the determinants of alliance performance. In this article we present a theoretical framework for understanding alliance performance in terms of its key antecedents. We submit that alliance performance is strongly influenced by particular characteristics of the partner firms as mediated by alliance conditions. We use the term partner analysis to denote the integrated approach comprising market analysis and resource analysis of partner firms. Alliance conditions are composed of collective strengths, interpartner conflicts, and interdependencies. We discuss the various linkages between the components of partner analysis, alliance conditions, and alliance performance. Finally, we develop a number of propositions to facilitate empirical testing of our partner analysis framework, and indicate its key implications for future research and managerial practice. r 2003 Elsevier Science Ltd. All rights reserved. Keywords: Partner analysis; Alliance performance; Resource analysis; Resource alignments; Alliance conditions 1. Introduction Strategic alliances are an increasingly popular strategy in an era characterized by blurring industry boundaries, fast-changing technologies, and global integration. We define strategic alliances as interfirm cooperative arrangements aimed at pursuing *Corresponding author. Tel.: ; fax: addresses: TK Das@baruch.cuny.edu (T.K. Das), teng@gwu.edu (B. Teng) /03/$ - see front matter r 2003 Elsevier Science Ltd. All rights reserved. doi: /s (03)

2 280 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) mutual strategic objectives. Examples of alliances include joint ventures, joint production, joint R&D, joint bidding, contracted R&D, co-marketing, product bundling, licensing, code-sharing, and so on. It is common knowledge now that the rate of alliance formation has been dramatic in recent years, and increasing research attention is being focused on how alliances can be managed to gain competitive advantage (Ireland, Hitt, & Vaidyanath, 2002). Whereas some well-known alliances for example, Toshiba and Timer Warner, and Merck and AB Astra have clearly benefited the partner firms, many other alliances have been plagued by unsatisfactory cooperation and poor performance in the marketplace. According to some researchers, about 60 percent of alliances can be considered as failures (Beamish, 1985; Das & Teng, 2000b). Also, alliances are found to have a lower success rate than formal or single organizations (Bleeke & Ernst, 1991; Kent, 1991). Given these developments, practitioners and researchers alike are intrigued by the question of alliance performance. Our purpose here, therefore, is to propose an integrated framework that evaluates prospective alliance performance through an analysis of the partner firms and the alliance conditions, drawing upon and integrating the two main approaches in the strategy literature competitor analysis and the resource-based view of the firm. We call this examination of the overall match between the partner firms as partner analysis, which covers partners market commonality, resource characteristics, and resource alignments. These three components of partner analysis affect the alliance conditions, which are composed of collective strengths, interpartner conflicts, and interdependencies. We propose that alliance condition variables are directly responsible for alliance performance. By introducing partner analysis and integrating its three components with the three aspects of alliance conditions, we seek to achieve a systematic appreciation of the determinants of alliance performance. Instead of covering a large number of factors, the proposed model calls attention to the most important determinants of alliance performance. Such a focused approach should facilitate both theory building and practical guidance. Fig. 1 depicts the major relationships among the variables of partner analysis, alliance conditions, and alliance performance in our proposed theoretical framework. 2. Alliance performance 2.1. Defining alliance performance Because ultimately any strategy has to be evaluated in terms of its success, alliance performance has attracted considerable research attention. Despite a significant amount of research, however, alliance performance remains one of the least understood aspects of alliances, in part due to certain empirical research obstacles. Researchers hardly agree on the measures of alliance performance. While some prefer subjective measures such as perceived satisfaction (Mjoen & Tallman, 1997; Parkhe, 1993), others use objective measures such as profitability and sales growth (Mohr & Spekman, 1994) or revenues and costs (Contractor & Lorange, 1988). Yet

3 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) Fig. 1. Framework of partner analysis, alliance conditions, and alliance performance. other studies use the survival-termination dichotomy as a proxy for alliance performance, based on the assumption that terminated alliances are less successful (Geringer & Hebert, 1989, 1991; Park & Russo, 1996). This last approach has been criticized for not measuring performance directly and also for co-mingling alliance performance and alliance instability (Inkpen & Beamish, 1997). In Table 1 we list some recent empirical studies, excluding those that treat alliance termination as denoting inferior alliance performance. This lack of agreement reflects an underlying conceptual puzzle: what does effective alliance performance mean? There are two distinct loci of alliance performance in the literature: the alliance itself and the partners forming the alliance (see Table 1). On the one hand, when alliances are viewed as separate entities, alliance performance is the success of these separate entities in terms of, say, profitability or growth rate. Joint venture research often adopts this alliance locus (Geringer & Hebert, 1991). On the other hand, because partner firms use alliances to achieve certain strategic objectives, alliance performance ought to be measured in terms of the aggregated results for the partner firms. Following this partner locus, a number of studies measure alliance performance through perceived fulfillment of partner firms strategic objectives (Parkhe, 1993; Yan & Gray, 1994; Zaheer, McEvily, & Perrone, 1998). A popular but less explicit form of the partner locus consists of measuring alliance performance in terms of the partner firms satisfaction with the alliance (Mjoen & Tallman, 1997).

4 282 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) Table 1 Selected empirical studies on alliance performance Study Conceptual framework or perspective Measures of alliance performance Locus of Major empirical findings performance a Aulakh, Kotabe, and Sahay (1996) Relational attributes Partner firms assessment of sales growth and market share of the alliance Beamish (1987) Partner attributes Mutual agreement regarding satisfaction between the partners Doz (1996) Alliance conditions, Partners assessment of value creation, learning and evolution cooperative behavior, and adjustment capabilities Dussauge and Garrette Eclectic Industry expert opinions on technical quality, (1995) commercial success and financial results Fryxell, Dooley, and Trust and control Partners perceptions of ROE, technology, Vryza (2002) etc. of the joint venture Harrigan (1988) Partner asymmetries Venture survival, duration, and firms assessment Inkpen and Currall (1997) Trust Partners perceptions of ROI, market share, etc. of the joint venture Luo (1997) Partner attributes ROI, sale, export, and operational risk of the joint venture Mjoen and Tallman (1997) Control Partner firms assessment Alliance and Partners Mohr and Spekman (1994) Alliance attributes, communication, and conflict resolution Parkhe (1993) Alliance structure Game theory Yan and Gray (1994) Bargaining power and control Zaheer, McEvily, and Perrone (1998) Satisfaction and dyadic sales Alliance and Partners Perceived fulfillment of strategic needs and indirect indicators Perceived achievement of each partner s objectives Alliance Relational norms and social control are positively related to alliance performance Partners Contributions of long-term importance are critical for satisfactory performance Alliance Initial conditions affect learning, which is responsible for alliance performance Alliance Semistructured alliances performed better than unstructured alliances Partners With trust, social control improves alliance performance Alliance Alliances between similar partners last longer. Alliances are more successful when partners and ventures are horizontally related Alliance Trust in partner firms is positively related to alliance performance Alliance Strategic traits and organizational traits of partner firms strongly affect alliance performance Overall control is positively related to alliance performance Coordination, commitment, trust, communication quality and so on are alliance performance predictors Partners Alliance performance is positively related to shadow of the future effect and non-recoverable investments, and negatively related to perceived opportunistic behavior Partners Management control mediates the relationship between bargaining power and alliance performance Trust Perceived partner firm goal achievement Partners Interorganizational trust is positively related to alliance performance a Whether the locus of performance is the alliance itself (e.g., JV profitability or partners satisfaction about the alliance s profitability) or the implications for the partners (i.e., achieving partners objectives).

5 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) The advantage of focusing on the partner is that it highlights the fact that an alliance is made up of partner firms, and the success of an alliance cannot be evaluated independently of the interests of the constituent partner firms. After all, economic rent-seeking by individual firms is the basis for any cooperative strategy. Because partner firms often have different objectives and motives in an alliance hidden or open the criteria and measures of alliance performance may be divergent. There are three possible ways that the objectives, motives, and performance criteria and measures of partner firms may match: they may be (1) the same or very similar, (2) compatible, or (3) conflicting. Similar objectives are closely related to each other and are therefore most likely to be achieved simultaneously. For example, sales level and market share are two similar performance criteria. Compatible objectives are not similar but may be achieved simultaneously. For instance, in Geringer and Hebert s (1991) list, sales level and profitability are compatible objectives because the two may albeit not necessarily be achieved simultaneously. In contrast, conflicting objectives are fundamentally at odds with each other. Such potentially conflicting objectives include economies of scale and product diversification. Because partners may not have similar or even compatible objectives in alliances, it is not always possible to identify mutually agreeable performance criteria. For instance, in measuring performance, the choice of an alliance locus in preference to a partner s locus is a questionable one. Also, one partner s perception of goal achievement cannot be sufficient. Therefore, Beamish (1987) and Harrigan (1988) use mutual satisfaction between the partners as a measure of alliance performance. In this article, we define alliance performance as the degree to which both partner firms achieve their strategic objectives in an alliance. If one firm succeeds in stealing its partner s technology, the alliance may not be viewed as a success because that partner s aim of protecting its technology is not achieved. We will generally assume only two partners in an alliance for purposes of simplicity, although our discussion also applies to multipartner alliances Research perspectives on alliance performance A review of the alliance performance literature, especially empirical studies, indicates a number of perspectives and approaches. One popular theme is that much of the alliance experience is about learning and knowledge acquisition. Knowledge acquisition alters the balance of bargaining power between partners a situation that leads to dissatisfaction on the part of at least one partner firm (Inkpen & Beamish, 1997). Other researchers believe that partner attributes have a lot to do with alliance performance (Beamish, 1987; Luo, 1997). Scholars also contend that the differences between the partners such as cultural differences are the culprit responsible for the failure of alliances. Doz (1996) discusses the relationship between initial conditions and alliance performance. Kogut (1989) focuses his research concerning joint venture failure on interpartner conflicts. According to him, having direct competitors as partners creates a contentious relationship that can easily go sour.

6 284 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) Hatfield and Pearce (1994) point to limited goal overlap as a key reason for dissatisfaction with alliance performance. Relational attributes are another explanation for alliance performance. Interfirm trust, in particular, has been found to be a critical factor in partner satisfaction and alliance success (Inkpen & Currall, 1997; Kanter, 1994). Researchers also point to the importance of partner cooperation, that is, the pursuit of mutual interests rather than acting opportunistically in the alliance (Das & Teng, 1998a, 2001b). Pearce (1997) suggests that political activities in alliances have negative effects on performance. Besides, network theory recognizes the effects of spillovers, as reputation gained in one alliance can be valuable in future interfirm relationships (Gulati, 1995; Jarillo, 1988). Thus, alliance performance and relational attributes can be intertwined within the broader network context. Alliance structure is also a highly relevant factor in alliance performance. Parkhe (1993) reports that appropriate alliance structure curbs opportunistic behavior and leads to better alliance performance. Alliance structure serves the purpose of control in alliances, which is critical because of the shared nature of alliance governance. Studies confirm that the nature of control based on the choice of control mechanisms is related to alliance performance (Fryxell, Dooley, & Vryza, 2002; Geringer & Hebert, 1989; Mjoen & Tallman, 1997). Finally, the impact of the external environment on alliance performance, such as technology and industry structure, has also been examined in the literature (Killing, 1988; Kogut, 1989). Of particular interest here is how changing environmental characteristics affect the dynamics and outcomes of alliances (Das & Teng, 2002a). Despite this long list of perspectives, the existing literature on alliance performance is lacking in two significant areas. First, the various critical issues relating to alliance performance remain diverse and fragmented in the literature, indicating the need for an adequate integration and a more coherent understanding. Secondly, and more specifically, the overall match between partner firms has not been explored adequately. While most of the issues listed above such as learning and conflict relate to key aspects of the alliance process, considerably less attention has been paid to the antecedents of these issues. Consequently, we do not have a sufficient understanding of why certain alliances are more plagued by interpartner conflicts than others and, also, why knowledge acquisition is smoother in some alliances than in others. Although the perspective that emphasizes partner attributes has revealed some degree of coherence, the perspective has not been systematically or adequately developed. For instance, the performance implications of partner differences and similarities have not been fully examined. To fill these gaps in the literature, we propose in this article a partner analysis approach to evaluating prospective performance in alliances. This approach focuses on internal factors between the partners rather than on environmental factors. We submit that the match between partner firms holds the key to predicting alliance performance, because this match defines the initial conditions of alliances and also affects the evolution of alliance conditions over time. Doz (1996) found that the initial conditions of alliances strongly influence learning processes and alliance performance. We argue that much theoretical purchase can be gained from analyzing

7 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) the partners involved in the alliance specifically, we contend that the market positions and resource endowments of the partner firms set the stage for future developments in the alliance. We recognize that the proposed approach focuses mainly on the contextual determinants of alliance performance. As noted earlier, research has shown that the alliance process significantly influences alliance performance. Concepts such as trust, conflict, learning, and opportunistic behavior all suggest that a process view of alliance performance is relevant and should be developed (Das & Teng, 2002a). Essentially, this process approach stresses the importance of evolution in alliances. For example, the goals and performance criteria of alliances may shift over time. A firm may start with the objective of learning, then move on to joint R&D, and finally market entry. Although many aspects of an alliance do evolve over time, our contextual framework focuses on the achievement of initial objectives of partner firms. While the process has a major impact on alliance outcomes, we argue that initial characteristics and conditions of the partners are also important determinants. The basic argument is that if one starts off with shortcomings it would be difficult, although not impossible, to achieve the original goals. Thus, while managing the process is important, having an advantageous head start is at least equally critical. In addition, because our approach stresses initial goals in alliances, our framework will be particularly applicable to alliances with clear goals. 3. Partner analysis An important stream of research in the alliance literature is about partner selection. It emphasizes the desirability of a match between the partners, mainly in terms of their resource profiles. This approach is consistent with the resource-based view of the firm, which suggests that competitors are defined by their resource profiles that is, firms with similar resources are potentially the closest rivals (Barney, 1991; Mahoney & Pandian, 1992). Although, admittedly, resources constitute a critical factor, we believe that the idea of a match between partners should not be limited to resources. Indeed, in strategy research, following the tradition of industrial organization economics, competitors are analyzed in terms of their market positions (Porter, 1980, 1985). Synthesizing the market approach with the resource approach to competitor analysis, Chen (1996) proposes that competitor analysis for the purpose of predicting interfirm rivalry should cover both market and resource elements. In addition, since competition often takes place in dyadic relationships, a firm-specific, pair-wise analysis of competition will be more productive in revealing interfirm rivalry (Chen, 1996, p. 105). We believe that a similar approach can be adopted in the study of interfirm cooperation, or strategic alliances. First, most alliances represent a dyad of partners. Thus, focusing on pair-wise relationships should be particularly meaningful for alliance research. Second, the inclusion of both market analysis and resource analysis of the partner firms will provide a more complete picture of how the partners fit

8 286 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) each other. Since market and resources are the two significant foundations for strategy making, an analysis of strategic alliances should, naturally, include both elements. As we will discuss below, market analysis here relates to interpartner market commonality, and resource analysis is comprised of resource characteristics and resource alignments. Thus, by partner analysis we mean the examination of the overall match between the partner firms in an alliance in terms of their interpartner market commonality, resource characteristics, and interpartner resource alignments. We list in Table 2 the definitions of the key terms in this article Market analysis In analyzing the interrelationships among firms in the marketplace, a key concept is market commonality, which is defined as the degree of presence that a competitor manifests in the markets it overlaps with the focal firm (Chen, 1996, p. 106). This concept is often related to the literature on multimarket contact (Gimeno & Woo, 1996), which is concerned with competition between two firms in several markets simultaneously (in one or more industries). There are two dimensions in the concept of market commonality. The first dimension is the strategic importance of a particular market to the focal firm that is, the proportion of the firm s revenue from this market relative to its total revenue from all markets. The second dimension is the presence of the other firm in the particular market that is, its market share in this market. Integrating these two aspects, market commonality essentially describes the seriousness and threat of a competitor to a focal firm. A high degree of market commonality suggests that a competitor has a substantial presence in markets that are important to the focal firm. Market commonality is not usually the same for two competitors due to competitive asymmetry. While firm A s markets may be substantially covered by firm B, the reverse may not be true. Our focus here, however, is the overall market commonality of two partner firms in an alliance. Therefore, we use the term interpartner market commonality as the total market commonality of the partner firms, i.e., the degree of presence that partner firms manifest in the market targeted by the alliance. This measures the level of competition between two firms. The idea of interpartner market commonality has not received much attention in the alliance literature. A few exceptions include Bleeke and Ernst (1991), who note the importance of geographic overlaps among partner firms (which is one type of interpartner market commonality). Park and Ungson (1997) suggest that competitive ventures that also have a high degree of commonality are more likely to fail. Further, Dowling, Roering, Carlin, and Wisnieski (1996) examine multifaceted relationships among partners, including the relationship of being competitors in some markets. It seems that, whereas partner firms with a high level of interpartner market commonality may have to follow a competitive approach, a low level of interpartner market commonality suggests that partner firms are more likely to complement each other.

9 3.2. Resource analysis T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) Resource analysis is the other element in partner analysis. Resource analysis, as we develop it here, has its foundation in the resource-based view (Das & Teng, 2000a). We suggest that there are two major components in resource analysis in alliances: resource characteristics of the partners and interpartner resource alignments. These two components are essential and mutually exclusive. Whereas the former is about the characteristics of the aggregated resources in the alliance, the latter deals with the type of fit between the partners resources that are being contributed to the alliance. Although the literature on resource characteristics is fairly substantial (Barney, 1991; Lippman & Rumelt, 1982), we do not have an adequately fine-grained understanding of interpartner resource alignments Resource characteristics According to the resource-based view, resource heterogeneity among organizations can be sustained over the long run because several resource characteristics are such that they prevent firms from having similar resources. Miller and Shamsie (1996) differentiate resources as protected either by property rights (property-based resources) or by knowledge barriers (knowledge-based resources). Barney (1991) lists four resource characteristics that form the foundation for sustained competitive advantage: valuable, rare, imperfectly imitable, and imperfectly substitutable. Other Table 2 Definitions of key terms Terms Strategic alliances Alliance performance Partner analysis Interpartner market commonality Interpartner resource alignments Resource similarity Resource utilization Alliance conditions Collective strengths Interpartner conflicts Interdependencies Definitions Interpartner cooperative arrangements aimed at pursuing mutual strategic objectives The degree to which both partner firms achieve their strategic objectives in an alliance The examination of the overall match between the partner firms in an alliance in terms of their interpartner market commonality, resource characteristics, and resource alignments The degree of presence that partner firms manifest in the market targeted by the alliance The pattern that integrates the resources of the partner firms The extent of the resource contribution of each partner firm that is comparable, in terms of both type and amount The degree to which contributed resources are being utilized to achieve the goals of the alliance The aggregate of selected characteristics of an alliance at any given moment in the life of the alliance The aggregate of all the resource endowments of the alliance The degree to which partner firms have competing interests, preferences, and practices that cannot be easily reconciled in an alliance The degree to which partner firms in an alliance need each other for the achievement of their goals

10 288 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) researchers suggest such desirable resource characteristics as imperfect mobility, low tradeability, durability, appropriability, and so on (Amit & Schoemaker, 1993; Peteraf, 1993). It seems to us that the three resource characteristics namely, imperfect mobility, imitability, and substitutability are critical for resource heterogeneity among alliance partners over an extended period. First, mobility, or tradeability, refers to the degree of ease and efficiency in trading resources in the factor markets. Certain resources have imperfect mobility because there are no factor markets in which trading can take place. For example, firm reputation is not tradeable, while managerial know-how and human resources are difficult to trade. It can be costly to evaluate certain resources, such as trademarks. Resources that are mingled with other resources will also be difficult to trade. In addition, resources such as organizational culture may lose much of their value if moved from one firm to another. Second, imitability refers to the degree of difficulty in replicating others valuable resources. Lippman and Rumelt (1982) suggest that uncertain imitability results from causal ambiguity, or a lack of transparency of what resources are responsible for success. Reed and DeFillippi (1990) note that causal ambiguity in one s own competency is related to its tacitness, complexity, and specificity. In addition, certain resources are imperfectly imitable because they are scarce. For example, the replication of a patented technology is simply not permissible. Third, substitutability is about developing different resources that meet the same need. Imperfect substitutability results from the specificity of many resources that is, there are no satisfactory substitutes. For example, financial resources are usually not substitutable, while substitutes for manufacturing capacity, perhaps by way of subcontracting, are very costly Interpartner resource alignments The resources contributed by partner firms are matched in various ways. Interpartner resource alignment refers to the pattern that integrates the resources of the partner firms. While the idea of resource fit has been around for some time, the idea of resource match and alignment has been confined almost exclusively to the complementary and supplementary patterns. These two patterns of fit are based only on the dimension of similarity of resources. The dimension of utilization of the resources has thus far been largely ignored (Das & Teng, 2000a). An implicit assumption in the literature is that all contributed resources are of the performing kind and are useful. In fact, a considerable amount of the resources in alliances is often not utilized, which for our present purposes means that the role of idle resources must be acknowledged in theorizing about resource fit. Thus, similar resources are not simply supplementary if certain portions are not being utilized or not performing in the alliance. Value creation in alliances is related not only to the degree of resource similarity, but also to the degree to which the committed resources are being utilized. Venkatraman (1989) discusses various types of fit described in the literature. Against this background, it seems that the nature of resource alignment is that of covariation that is, the degree of internal consistency and usefulness in the

11 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) partners resource contributions. Accordingly, interpartner resource alignment is conceptualized here as comprised of two separate dimensions: resource similarity and resource utilization. Resource similarity is defined, following Chen (1996), as the extent of resource contribution of each partner firm that is comparable, in terms of both type and amount (p. 107). Resources have been classified in the literature according to, for instance, whether they are physical, financial, technological, managerial, or organizational resources. Resource similarity will be high if both the type and the amount of contributed resources are comparable for the partners. For example, in a joint production agreement the two partners may both contribute 50 percent of the overall manufacturing capacity. On the other hand, the resource similarity in R&D contracts tends to be low, because one firm typically makes a financial contribution and the other carries out the actual research (i.e., contributes technological resources). Resource utilization refers to the degree to which contributed resources are being utilized to achieve the goals of the alliance (Das & Teng, 2000a). An important distinction has to be made here between performing and non-performing resources. There are three kinds of non-performing resources: non-separable, deliberate or unintended surplus, and incompatible. First, certain resources are brought into an alliance but are not utilized fully because they are not separable from the other resources that are needed. For example, it is sometimes difficult to separate technological resources (e.g., ability to conduct R&D) from physical resources (e.g., machinery). In order to contribute technological resources, it becomes unavoidable to commit the physical resources also, and these may not be fully utilized in the alliance. When entering joint ventures, firms generally have to contend with the inseparability of resources, which inevitably means having to carry resources that are non-performing. Second, in some cases the partners may simply decide to bring surplus resources into the alliance for future usage. Finally, certain resources are not utilized in an alliance because they are not compatible with each other. When partners have different managerial routines and decision-making styles, they may well be incompatible and cannot be fully performing. Whatever the situation, the key is that these resources are not performing for the alliance at least for the time being. As suggested by Das and Teng (2000a), given the two dimensions of resource similarity and resource utilization, four types of interpartner resource alignments can be derived: supplementary, surplus, complementary, and wasteful. With the addition of the dimension of resource utilization, it is clear that the supplementary and complementary alignments discussed here differ significantly from the notions of complementary and supplementary fit found in the extant literature. Also, an alliance may, in principle, have more than one resource alignment at any point in time although a specific type of alignment will usually be dominant. In particular, an alliance may have supplementary and surplus resource alignments at the same time the first one obviously intended and the second usually unintended. Similarly, an alliance may have complementary and wasteful resource alignments simultaneously again, the first intended and the second unavoidable. However, each of these four resource alignments has a different impact upon the three alliance conditions we will introduce in the following section.

12 290 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) In our framework, a supplementary interpartner resource alignment exists when the partner firms contribute similar resources that are performing in the alliance. A surplus interpartner resource alignment refers to a situation in which some portions of the partner contributions of similar resources are not utilized in the alliance that is, there are slack resources. A complementary interpartner resource alignment is present when dissimilar resources are contributed and these resources are fully performing for the achievement of alliance goals. Finally, a wasteful interpartner resource alignment results from a combination of dissimilar resources that are not fully performing. So far we have discussed the components of partner analysis, comprising market analysis and resource analysis. Now we turn to a discussion of the second major element in our theoretical framework, namely the alliance conditions. 4. Characteristics of alliance conditions Alliance conditions refer to the aggregate of selected characteristics of an alliance at any given moment in the life of the alliance. One may differentiate between the initial alliance conditions at the moment of alliance formation and subsequently evolving alliance conditions at later stages (Das & Teng, 2002a). Therefore, alliance conditions can be viewed as evolving over time, enabling us to link initial alliance characteristics with eventual alliance performance. We noted earlier that a number of factors may determine alliance performance, including learning, knowledge acquisition and bargaining, interfirm conflicts, control, and so on. We propose that the effects of these various factors can be subsumed under three main characteristics: collective strengths, interpartner conflicts, and interdependencies. These three variables cover, in a systematic manner, the three important aspects of alliances: positive effects of alliances (collective strengths), negative effects of alliances (interpartner conflicts), and the necessity for alliances (interdependencies). We note that two researchers have also proposed alliance condition variables. Doz (1996) suggests four condition variables task definition, partners routines, interface structure, and expectations whereas Niederkofler (1991) emphasizes the conditions of strategic fit and operational fit in alliances. Doz s variables are more about the technical aspects of an alliance and deal less with the relational aspects. Niederkofler s choices, on the other hand, are somewhat abstract, making it difficult to connect with other variables discussed in the literature. Thus, in addition to their parsimony, our three variables are preferable because (1) they are grounded in previous research (e.g., easy to relate to known variables), and (2) they systematically capture, as we noted earlier, the positive and negative effects of alliances as well as the need for alliances Collective strengths The collective strengths of an alliance denote the aggregate of all the resource endowments of the alliance. They include all kinds of resources and serve as the

13 rationale for partners coming together in the alliance. These strengths are derived from the synergistic combining of partner resources and are utilized to create value in the alliance entity. Nielsen (1988) discusses four types of cooperative strategies: pool, exchange, de-escalate (competition), and contingency. The pool and exchange strategies are clearly aimed at increasing collective strengths, through either supplementary (pool) or complementary (exchange) resource contributions. In brief, when assessing the alliance conditions at any point in time, the collective strengths of the partners form a crucial part of that assessment Interpartner conflicts Conflicts between the partners in an alliance constitute a second critical component of alliance conditions. Interpartner conflicts refer to the degree to which partner firms have competing interests, preferences, and practices that cannot be easily reconciled in an alliance. Conflicts can be both between the parent organizations and within the context of an alliance. There are two major types of interpartner conflicts. First, firms have problems whenever there are too many differences in strategic orientations, technological systems, corporate cultures, risk perceptions, and managerial practices (Das & Teng, 1998b, 1999, 2001a; Park & Ungson, 1997). Interpartner diversity can also create problems in interfirm cooperation. The second source of interpartner conflicts consists in the individual efforts of each partner to garner maximum benefits for itself. Conflicts may thus arise from incompatible goals, resource allocation disagreements, opportunistic behavior, knowledge imitation, and competition in downstream markets. In general, the prevalence of interpartner conflicts is widely noted in the literature (Bucklin & Sengupta, 1993; Kogut, 1988; Hardy & Phillips, 1998), so that such conflicts constitute a significant aspect of alliance conditions. Because of interpartner conflicts, partners scramble for more control in alliances. Alternatively, Buckley and Casson (1988) suggest, partners may exercise mutual forbearance or pass up short-term interests for the sake of harmony and cooperation. Nevertheless, the level of conflict has also been found to be negatively related to interfirm trust (Zaheer et al., 1998). When interpartner conflicts run deep, mutual forbearance and trust would be difficult to cultivate. Hence, conflict resolution measures may be needed to make the relationship run smoothly. We should note that interfirm conflicts may sometimes have certain positive effects in alliances. For example, such conflicts may lead to increased communication between partners, which may result in sharpened strategic objectives and a better understanding of each other s positions Interdependencies T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) Two important perspectives on interorganizational relations are the powerdependence theory (Cook, 1977; Emerson, 1962) and the resource-dependence theory (Pfeffer & Salancik, 1978). The power-dependence theory explains

14 292 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) interpersonal and interfirm relationships in terms of how much A and B need each other and therefore the amount of power they have over each other. Similarly, the resource-dependence theory suggests that, to varying degrees, firms depend on the valuable resources of other firms, so that they have to manage the dependent relationships well, especially the more important ones. Based on these perspectives, interdependence can be seen as the core of interfirm relations because the relative dependence between two firms determines their relative power (Das & Teng, 2002b). Interdependencies refer to the degree to which partner firms need each other in an alliance for the achievement of their goals. Because firms are oftentimes not self-sufficient, they establish interfirm links to control their dependence on external resources (Pfeffer & Nowak, 1976). Alliances will be formed only if there is a certain degree of mutual dependence in terms of the need for resources. Hence, interdependence is a critical premise for the formation and continuation of alliances. Gulati (1995) found empirically that strategic interdependence contributes to alliance formation. We should note, however, that interdependence implies a mutual and symmetrical relationship. The extreme of asymmetrical interdependence amounts to no interdependence, whereby only one party depends on the other. The key, as Sheppard and Sherman (1998) note, is the difference between dependence (as unidirectional) and interdependence (as mutual). They also argue that interdependence between parties can be either shallow (low level) or deep (high level). Whereas shallow interdependence suggests that alliance partners will not have wide-ranging relationships, deep interdependence indicates that they will rely on each other to a great extent. Alliance partners may have either a shallow or a deep interdependence, contingent upon the importance of their relationship and their history of prior interactions Interactions among the three alliance conditions In brief, collective strengths, interpartner conflicts, and interdependencies represent three major alliance conditions. These three condition variables are interrelated in an alliance. Collective strengths are negatively related to interpartner conflicts. First, it is apparent that increasing interpartner conflicts will sap the collective strengths of an alliance. If partner firms cannot effectively collaborate, the overall strengths of an alliance will be undermined. Kogut (1988, 1989) reports that interpartner conflicts undermine the stability of alliances. Second, as we noted, interpartner conflicts are of two major types: unproductive differences between partners and the maximization of private interests. When the collective strengths of an alliance are on a downward slide, it is likely that partner differences will be highlighted and the partners will become more disenchanted with each other. They will be more interested in taking control of the alliance, which may contribute to the sharpening of differences in strategic orientations and managerial practices. Furthermore, partner firms will become more concerned with their private interests when collective strengths go down, as public or common interests then become harder to achieve through the alliance.

15 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) Interpartner conflicts and interdependencies will be negatively associated in an alliance. According to the bilateral deterrence theory (Bacharach & Lawler, 1981), one s own incentive for conflict is reduced when total interdependencies increase on account of a fear of strong retaliation, such as dissolving the relationship. When interdependencies are on the rise, partners tend to curb their inherent tendency to maximize private interests and, instead, work harder to cooperate. Following this logic in marketing relationships, Kumar et al. (1998) proposed, and empirically found, a negative relationship between conflicts and total interdependencies. Besides, a higher conflict level among partners also weakens their interdependencies, as partners realize that their need for each other is being thwarted and eroded in practice. Finally, collective strengths and interdependencies will be positively related for two reasons. First, when two partner firms can achieve a high level of collective strengths that may not be attained by any single firm, their need for each other will be high. Strong joint resources and capabilities suggest the necessity for an alliance (or interdependencies). Second, a high level of interdependencies may also prompt partners to contribute more resources and capabilities to the alliance, leading to higher collective strengths. We now turn to the determinative relationships between the components of partner analysis, discussed above, and the three characteristics of alliance conditions. 5. Linking partner analysis with alliance conditions We summarize in Table 3 the proposed relationships between the different components of partner analysis interpartner market commonality, resource characteristics, and interpartner resource alignments and alliance conditions Interpartner market commonality and alliance conditions We suggest that the degree of interpartner market commonality will be positively related to the collective strengths of the alliance. When two alliance partners compete mainly in similar product categories and market segments, their market share and therefore their market power will be a direct sum of the shares. By comparison, it is more difficult for partners that compete in different markets and industries to garner similar market power. Although some researchers warn that colluding with competitors is a dead end (Harari, 1994, p. 53), alliances such as that between Sony and Phillips essentially represent cooperation between direct competitors. And the logic is clearly to amass strengths in common areas. For example, in the automobile industry, companies have formed alliances (e.g., GM and Toyota, Ford and Mazda) in an effort to enhance strengths in common business areas. Obviously, since firms with high interpartner market commonality enjoy greater overlaps in their businesses, the alliances tend to be present in their overlapping businesses. This also enables the partners to take advantage of the economies of scale more easily. In addition, alliances between direct competitors

16 294 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) serve to de-escalate competition between them (Bresnahan & Salop, 1986; Nielsen, 1988). A reduction in competition, as in the OPEC oil cartel, increases the relative strengths of the partners. Proposition 1. Interpartner market commonality will be positively related to collective strengths in alliances. On the other hand, alliance partners with a high degree of interpartner market commonality are also likely to have a high degree of interpartner conflict, mainly because they are direct and immediate competitors. Park and Ungson (1997) report that joint ventures are more likely to dissolve when partners are direct competitors. According to these authors, in a joint venture between competitors, goals are likely to be in direct conflict (p. 289). Because partners compete in similar markets, their alliance is likely to alter their competitive positions in one way or another. Moreover, because one partner s gain is often at the expense of the other partner, their relationship is more likely to be of the zero-sum character. Although direct competitors in the same market may also have common goals, such as setting technology standards, their conflict level is almost always higher than noncompetitors. After all, direct competitors are preoccupied with competitive incentives (Kogut, 1989, p. 185). Non-competitors may not have many overlapping goals, but the fact that they do not compete for the same customers suggests negligible conflicts of interest. Conflicting interests among partners make it very difficult to align the long-term interests of direct competitors (Kogut, 1988). Bleeke and Ernst (1991) report that geographic overlaps between firms create problems in alliances. Balakrishnan and Koza (1993) also found that the stock market reacts more favorably to joint ventures formed between partners who are in dissimilar businesses. One explanation is that investors expect the potential for interpartner conflicts to be serious enough to undermine performance in alliances between direct competitors. From a competitive point of view, however, the literature on multimarket contact suggests that more multimarket contacts between two firms lead to a lower level of rivalry in each of the markets in which they compete, owing to the shadow of many retaliation opportunities (Chen, 1996; Gimeno & Woo, 1996). We should note that interpartner conflicts differ from rivalry in substantive ways. Whereas rivalry is action-oriented, interpartner conflicts underscore competing interests without necessarily implying action imperatives. In addition, the multimarket contact literature focuses on rivalry in a competitive context, whereas our notion of interpartner conflicts is in a cooperative context. One can argue that a low level of rivalry due to interpartner market commonality creates an environment conducive to cooperative arrangements such as alliances. Within alliances, though, the scope for interpartner conflicts will tend to be substantial, again because the parent firms are direct competitors. Proposition 2. Interpartner market commonality will be positively related to interpartner conflicts in alliances.

17 T.K. Das, B.-S. Teng / Scand. J. Mgmt. 19 (2003) Table 3 Effects of partner analysis components on alliance conditions Alliance conditions Collective strengths Interpartner conflicts Interdependencies Market commonality Positive a Positive No effect Resource mobility, imitability, and substitutability No effect Positive Negative Partner resource alignments Supplementary [Similar-Performing] Positive No effect Positive Surplus[Similar-Non-performing] No effect Negative Negative Complementary [Dissimilar-Performing] Positive No effect Positive Wasteful [Dissimilar-Non-performing] No effect Positive Negative a The term positive here means that market commonality would have a positive effect on the level of collective strengths. We also suggest that there will be no significant relationship between the interpartner market commonality of partners and their interdependencies. Whereas partners with high interpartner market commonality need each other for aggregated market power and economies of scale (or a supplementary alignment), partners with low interpartner market commonality need each other for specialized resources and capabilities (or a complementary alignment). There seems little reason to expect one partner to be dominant over the other Resource characteristics and alliance conditions As we noted earlier, mobility, imitability, and substitutability are the three important resource characteristics. Thus, we can examine the overall resource profile of an alliance on the basis of these characteristics. While mobility measures the degree of tradeability of resources in the factor markets, imitability is about replicating the valuable resources of others, and substitutability is concerned with meeting the same need through other resources. We argue that imperfect mobility, imitability, and substitutability are important for alliance formation. Should a firm s needed resources be perfectly mobile, imitable, and substitutable, then there will be little need for joining forces with other firms. The firm in question can either purchase the resources in the market, replicate the same resources on its own, or develop other resources for the same usage. These three resource characteristics constitute a barrier in procuring resources independently. As a result, strategic alliances are formed to obtain access to needed resources. After the alliance is formed, the mobility, imitability, and substitutability of the contributed resources continue to affect the degree of interdependence between partners. Imperfect mobility means that one firm has to stay in the alliance in order to secure continued access to the particular resources. For example, a small firm may