Strategic Management Journal

Strat. Mgmt. J., 29: 639661 (2008)

Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.679
Received 31 May 2002; Final revision received 2 January 2008

DESIGNING ALLIANCE NETWORKS: THE INFLUENCE

OF NETWORK POSITION, ENVIRONMENTAL
CHANGE, AND STRATEGY ON FIRM PERFORMANCE
BALAJI R. KOKA1 and JOHN E. PRESCOTT2 *
1
W. P. Carey School of Business, Arizona State University, Tempe, Arizona, U.S.A.
2
Katz Graduate School of Business, University of Pittsburgh, Pittsburgh,
Pennsylvania, U.S.A.

Alliance networks are strategic decisions involving trade-offs between two stylized structural
design choices: prominent and entrepreneurial. Prominent alliance networks emphasize benefits
arising out of multiple access and affiliation to other prominent firms in the network. An
entrepreneurial position, on the other hand, emphasizes brokerage and diversity benefits arising
out of access to nonredundant and diverse information. We demonstrate that the performance
benefits of each type of alliance network are contingent on environmental change and strategy,
and are thus time dependent. Following an environmental change event in the steel industry,
alliance networks that were more entrepreneurial performed better, while those that were more
prominent suffered performance decline. However, when the change was radical, both types of
alliance networks were negatively related to performance. We suggest that following a radical
change, industry alliance networks may not have the requisite information necessary for quick
and effective strategic responses. Firms pursuing an analyzer strategy performed better when
emphasizing a prominent, and to a lesser extent, entrepreneurial alliance network. However, firms
that develop an alliance network high on both prominent and entrepreneurial structural positions
had lower relative performance. Our results indicate the need for managers to assess their
alliance portfolio over time and redesign it based on environmental and strategic contingencies.
Copyright 2008 John Wiley & Sons, Ltd.

INTRODUCTION networks affect performance has important man-

If and how alliance network positions influence
firm performance has become a dominant theme
of strategy and organizational research. Such inter-
est reflects the widespread belief that the struc-
ture of alliance networks influences firm perfor-
mance and such influence is more often than not
positive. Since the structural design of alliance
networks has significant strategic consequences,
establishing the conditions under which alliance
Keywords: alliance networks; network position; entrepre-
neurial network position; prominent network position;
network structure and performance; social networks
*Correspondence to: John E. Prescott, Katz Graduate School of
Business, University of Pittsburgh, Pittsburgh, PA 15 260, U.S.A.
E-mail: prescott@ katz.pitt.edu
agerial consequences. Research has emphasized
two distinct yet interrelated approaches to the
structural design of alliance networks. In the first
approach, firms pursue a network strategy that
enables them to attain a position of prominence in
the network. Benefits to network prominence arise
out of access to critical and key information in
the network due to the formation of multiple ties
with many partners. In addition, such a position
enables the firm to influence its partners in ways
that enable it to pursue and establish its own strate-
gic agenda, thus enhancing its own performance. In
the second approach, firms pursue a network strat-
egy that enables them to occupy an entrepreneurial
position in the network. Benefits from such an
entrepreneurial position occur because of nonre-
dundant information, information diversity, and

Copyright 2008 John Wiley & Sons, Ltd.

640 B. R. Koka and J. E. Prescott
control of information flow, which in turn enhance
firm performance.
However there is little consistent empirical evi-
dence for the hypothesis that either of these
two different structural approaches to designing
alliance networks positively affect firm perfor-
mance. For instance, being central (a proxy for
prominence) in the network was associated with
more innovation in the biotech industry (Powell,
Koput, and Smith-Doerr, 1996) but poorer per-
formance in the steel industry (Madhavan, 1996).
Similarly, multiple structural holes (a proxy for
an entrepreneurial position) in the network were
associated with higher innovativeness (Zaheer and
Bell, 2005) but fewer patents (Ahuja, 2000a).
We argue that such inconsistencies in the evi-
dence are a result of a theoretical approach that
has typically not examined the contextually-based
performance trade-offs between the two network
positions over time. Network researchers have
only recently begun to examine contingencies that
impact the design of a firms alliance portfolio
(Burt, 2000; Rowley, Behrens, and Krackhardt,
2000; Koka and Prescott, 2002; Podolny, Stu-
art, and Hannan, 1996). Building on these stud-
ies, we make the argument that these two net-
work positions provide different benefits and con-
sequently will have different effects on firm perfor-
mance conditioned by environmental change and
firm strategy. Instead of asking if network posi-
tions affect firm performance, we thus focus on
a more important and nuanced question: under
what conditions are the two different types of
network positions effective in enhancing firm per-
formance? We study this question by focusing
on two important contingenciesenvironmental
change and firm strategythat we argue interact
with the two different network positions to effect
firm performance.
Our findings uniquely contribute to the network
literature in four ways. First, when environmen-
tal change occurs in an industry, firms that have
developed an entrepreneurial position perform bet-
ter while firms that were prominent in the network
suffer performance decline. However, when there
is more rather than less radical change, both net-
work positions are negatively related to perfor-
mance. Second, our methods allowed us to ask
if the benefits of a network position are stable
over time. Our results indicate that the effect of
particular network positions on firm performance
changes over time. This finding suggests that over
Copyright 2008 John Wiley & Sons, Ltd.
time, managers need to assess their alliance port-
folios and make structural adjustments based on
environmental and strategic contingencies. Third,
firms pursuing an analyzer strategy perform bet-
ter when they develop network positions that are a
combination of prominent and, to a lesser extent,
entrepreneurial positions. Fourth, firms that have
high levels on both network positions have lower
relative performance. Our findings cumulatively
reinforce the need for researchers to identify and
explicate the conditions under which the struc-
ture of network positions are likely to enhance or
detract from firm performance.
THEORY DEVELOPMENT
In recent years, strategic alliances have become an
integral component of a firms strategy to access
and acquire resources from external sources. View-
ed as access relationships, alliances act as conduits
for the flow of hitherto unavailable resources and
capabilities. Information, knowledge, and other
resources diffuse through the network created by
the individual alliances and interfirm linkages that
bind all the firms in the network. In essence, such a
network is the reservoir of all the benefits residing
within the industry, and the firms network position
is an indicator of the benefits the firm can access
through its alliance relationships. However, there
has been considerable debate regarding how differ-
ent types of structural network positions influence
the flow of benefits and consequently firm perfor-
mance.
Two different yet interrelated structural appro-
aches have largely driven research (Podolny,
2001). In essence, these two approaches reflect
alternative network strategies employed by firms
in the pursuit of competitive advantage. The first
approach emphasizes the benefits arising to firms
because of their prominence in the network. The
second approach draws on Burts (1992) structural
holes construct to emphasize entrepreneurial ben-
efits arising to firms. Debates on the importance
of dense versus sparse networks (Coleman, 1988;
Burt, 1992); direct versus indirect ties (Ahuja,
2000b); information volume versus information
diversity (Koka and Prescott, 2002); centrality
(Powell, et al. 1996) versus structural holes (Burt,
1992); seem to naturally align both explicitly and
implicitly with these two structural positions. For
instance, structural holes, indirect ties, and sparse
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj

networks all focus on the entrepreneurial potential
for brokerage and diversity as the basis for net-
work benefits. Researchers have, however, tended
to explore the implications of these similar con-
structs separately. There has been little attempt
to develop a broad theory of network structural
position that integrates these similar constructs
into a broad umbrella position by focusing on
the nature of the underlying benefits that accrue
to the firm. Similarly, arguments underlying the
importance of multiple direct ties with many part-
ners, and/or centrality in the design of alliance
networks, all highlight the benefits accruing to
firms because of multiple accesses to valuable
information in the network. Here again, rarely
have network researchers examined the degree to
which these different constructs are theoretically
and empirically related. Given the above frag-
mented nature of this literature, it is therefore not
surprising that there is little consistent evidence
for the structural effect of alliance networks on
firm performance (Koka and Prescott, 2002). We
draw on these themes to explicate the two differ-
ent approaches to designing alliance networks, to
review their underlying theoretical logic and deter-
mine how researchers have operationalized the two
positions, and to identify the sources and benefits
of each position.
Network prominence
Firms pursuing prominence in the alliance network
seek to take advantage of network benefits arising
out of two distinct mechanisms. First, prominence
provides significantly more access to key and valu-
able information relative to those less prominent
in the network. Second, affiliation-based benefits
provide opportunities for the prominent firm to
establish its competitive and strategic agenda as
the defining norm in the industry/network. Theo-
retically, both lead to competitive advantage and
superior performance.
Access arguments primarily focus on the quan-
tity of reliable information that the prominent firm
can acquire through its network. Benefits here is a
function of the number of partners with whom the
firm has alliances, as well as the number of ties it
has with each partner. Closely related to the idea of
multiple accesses is the notion of centrality. Cen-
tral firms possess more access to key information
that is locally residing in the network because of
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 641
the direct contact that they have with multiple part-
ners. Information is available at a shorter distance
(because of direct relations or fewer intermedi-
aries) to well-connected firms, and is therefore
available early. Direct access also reduces search
costs (Cyert and March, 1963), which enhances
efficiency of search and transfer process.
Apart from quantity, network prominence ben-
efits also stem from the quality of access. Mul-
tiple ties between partners engender interdepen-
dence between the partners (Rowley et al., 2000).
Interdependence is directly related to the level of
resource commitment to the relationship. High lev-
els of resource commitment increase frequency of
interaction between the partners, which enhances
the quality of the exchange relationships. Such
ties enable firms to know more about each others
operations, facilitating the transfer of tacit knowl-
edge across organizational boundaries (Hagg et al.,
1982; Larson 1992) that is geared toward problem
solving (Uzzi, 1996). Transfer is also facilitated
by the institution of similar processes and routines
between the exchange partners. Similarity in pro-
cesses and routines in turn facilitate joint and coor-
dinated action by the partners resulting in enhanced
effectiveness and consequent performance benefits.
Network prominence benefits go beyond access
to include those based on affiliation. As Podolny
(2001) points out, alliances are also signaling
devices. Attributions based on the characteristics
of the partner firms are significant influences on
firms eventual performance because of legitimacy
and reputation effects. In other words, affiliations
to prominent firms by way of alliances enhance
the reputation of the partner firm leading to per-
formance benefits. At one level, legitimacy con-
cerns ensure that prominent firms seek to partner
with other firms that have similar status. Designing
alliance networks following this strategy ensures
that prominent firms continue to be prominent
in their network. Additionally, formation of ties
with similar others leads to alignment of inter-
ests. It thus facilitates mobilization and pooling of
resources aimed at legitimizing and establishing
dominance in the industry. Such joint and coordi-
nated action facilitates the exploitation of existing
technologies and organizational practices result-
ing in competitive advantage. Network prominence
also depends on forming relationships with less
prominent firms. For the less prominent firms, rela-
tionships with prominent firms provide legitimacy
benefits. Prominent firms on the other hand benefit
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642 B. R. Koka and J. E. Prescott
by way of favorable contracts and benefits aris-
ing from their stronger bargaining position. Such
a bargaining position translates into an opportu-
nity for the prominent firm to establish standards
and norms with their weaker partners that favor its
own bases of competitive advantage, thus further-
ing its strategic agenda. Thus prominence by virtue
of its many ties with multiple partners enables
the widespread transmission of processes and rou-
tines that revolve around particular technologies
and strategies favored by the prominent firm. Not
only do these alliances enable the prominent firm
to control and exploit existing opportunities in the
industry, they also enable it to control the trajec-
tory and direction of any new knowledge created in
the network by controlling and directing resources
only to those projects that favor its own competi-
tive position.
Finally, being prominent in the network also
enables firms to reinforce their structural position.
Multiple experiences at managing collaborative
activities across firm boundaries create opportu-
nities to leverage alliance capabilities with other
partners in other contexts. Further, initial collab-
orations lead to reputation effects that facilitate
the creation of more ties, not only with each
other, but also with other partners, which increases
their prominence (Powell et al., 1996). Since such
partners are more likely to be those that already
have ties with the firms existing partners, net-
work prominence may also result in dense cohe-
sive networks that further facilitate transfer of
valuable fine-grained information. Since informa-
tion acquisition, exploitation, and dissemination is
time-consuming and costly, firms that are highly
prominent in the network are likely to realize sig-
nificant benefits necessary to maintain competitive
advantage. A limitation of such a position is that
new and different information not part of the local
network may not be received, may be received
more slowly, or may be subject to attention and
blind-spot biases. Thus, when change occurs in an
industry that requires access to new and/or differ-
ent types of information, firms that are prominent
in the existing network are at a considerable dis-
advantage.
Entrepreneurial position
Firms pursuing an entrepreneurial position in the
network seek to take advantage of the benefits aris-
ing out of both control and participation in resource
Copyright 2008 John Wiley & Sons, Ltd.
diffusion between different and often unconnected
groups in the network (Burt, 2000). In addi-
tion, firms in an entrepreneurial position benefit
from information diversity because of their focus
on partner diversity in designing their alliance
network.
Such a position draws on the key insight that
network density is rarely uniform throughout a
network. While parts of a network are likely
to be dense, other areas are more likely to be
sparsely populated with ties. It thus provides
entrepreneurial opportunities to firms that can act
as bridges between the different parts of the net-
work. Such entrepreneurial opportunities exist only
so far as the actors contacts are otherwise discon-
nected, such as in a brokering role. The more the
actors partners know one another, the more likely
it is that the actors ability to bridge the different
groups is diminished.
A key construct that underlies the entrepre-
neurial position is the structural holes construct
that emphasizes the social capital benefits aris-
ing out of control over the flow of information
and the access to diverse information. Since social
actors with many structural holes are likely to
possess sparsely connected networks (because of
the lack of ties between the firms partners), they
benefit from brokering the connection between
the groups that are otherwise unconnected (Burt,
2000). They are more likely to have informa-
tion benefits that are additive because their con-
tacts are nonredundant. They also have access to
diversity of information because they bridge dif-
ferent groups that have different information con-
tent. Such diversity of information benefits also
occurs because of the differences in the character-
istics of the partners (Koka and Prescott, 2002).
Consistent with the firm heterogeneity tenet, firms
in a network possess differential information con-
tent. Since differentially endowed firms linked in a
network operate in different market segments, uti-
lize different technologies, and sometimes belong
to different industries, they are sources of differ-
ent information content. Between two firms hav-
ing the same number of alliances, the firm that
has more diverse contacts (say ties distributed
among firms in different strategic groups) has
access to more nonredundant and diverse infor-
mation.
From an alliance network point of view, such a
network position primarily provides opportunities
for the firm to recombine the diverse information
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and knowledge into novel combinations that enable
it to provide unique offerings to the market. In that
sense it enables the exploration of new markets
providing first mover advantages to the firm. Such
first mover advantages are also facilitated by the
fact that the firms in the entrepreneurial position
get new and novel information earlier than others
in the network. Advantages to such a position also
include the nonredundancy benefits of the network
structure since it provides for an efficient use of the
firms alliance capabilities. In addition, due to their
strategic location at the crossroads of information
between different groups, such firms also con-
trol the flow and diffusion of information within
the network by providing these groups opportuni-
ties to form consortia and networks wherein they
can orchestrate the actions of multiple firms with
diverse capabilities in order to create new mar-
kets and products. Thus, apart from getting access
to diverse information earlier than others, such
firms more than others are likely to control the
pace and rate of change and innovation in the net-
work thereby enhancing their competitive position
in the network. A limitation of such a position
is that the ability to develop strong cohesive ties
is attenuated and thus the transfer of tacit knowl-
edge is limited. Such a position is also less con-
ducive to the quick mobilization and coordination
of resources because the lack of alignment of inter-
ests between the partners ultimately has an impact
on efficiency.
HYPOTHESES DEVELOPMENT
An appreciation for the prominent and entrepre-
neurial approaches to the structural design of
alliance networks is important because they focus
our attention on the different sources and types
of benefits that are available to a firm from
its network of interfirm relations. Understanding
the different sources and types of benefits that
accrue to a firm as a result of these two struc-
tural positions provide an opportunity for man-
agers to design an alliance network that fits
their strategic context. Thus, our logic leads us
to propose a contingency element in specify-
ing the relationship of the two types of net-
work positions and firm performance. We exam-
ined two contingencies at the environment and
firm levels of analysis to explore the proposi-
tion that the interaction of network prominence
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 643
and entrepreneurial position with environmental
change and firm strategy influences their effect on
firm performance.
Environmental level of analysis contingency:
environmental change
The influence of environments on firm perfor-
mance has been one of the central themes in strat-
egy (Porter, 1980). More directly related to our
research question is the contingency approach that
has focused on explaining firm performance as a
function of the fit between organizational struc-
ture and environmental characteristics (Lawrence
and Lorsch, 1967). Extending this argument to
the interorganizational level, researchers (Rowley
et al., 2000; Burt, 2000) have argued that the effect
of network positions on firm performance is mod-
erated by environmental context. Underlying this
argument is the fact that changes in the environ-
ment affect the nature of skills and capabilities
important for competitive advantage. Since net-
work positions are a critical mechanism for firms
to acquire these capabilities and since different net-
work positions provide differential benefits, firms
need to strategically design their networks if they
are to acquire the appropriate skills and capabil-
ities in the changed environment. Any mismatch
between the needs of the environment and the
firms alliance position could thus have serious
performance implications.
We build on Burt (2000) and Rowley et al.
(2000) studies to examine this contingency. Both
argued that turbulent environments require a net-
work position that facilitates exploration, while
stable environments emphasize the importance of
network positions that enable exploitation. How-
ever, Rowley et al. (2000) found limited support
for their proposition that strong ties are valuable
in environments that require exploitation, while
weak ties would be more appropriate for explo-
ration. Apart from the narrow focus on only tie-
strength to operationalize network position, their
weak results could be attributed to an implicit
assumption in their analysis that environmental
characteristics and competitive dynamics are stable
over time. Such an assumption may not be valid.
Even in the steel industry, which is the context of
their study, the implementation of Compact strip
casting technology changed competitive dynam-
ics. In other words, while exploitation might be
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj
644 B. R. Koka and J. E. Prescott
valid prior to the introduction of a new technol-
ogy, network positions that enable exploration may
be more appropriate in the new environment. We
examine this proposition by focusing on environ-
mental change as a key contingency that affects the
effect of network position on firm performance.
We follow an event-based logic to operational-
ize environmental change. Evidence suggests that
firms take advantage of environmental change trig-
gered by industry events as occasions to structure
their networks (Barley, 1986; Madhavan, Koka and
Prescott, 1998) since such changes alter the bases
of competition. Such changes thus create pressures
for different capabilities requiring firms to mod-
ify the criteria for selecting partners and managing
alliances. A network position that was effective in
the previous environment may be inappropriate in
the new environment following the industry event.
Firms need to maneuver to discard old alliances
and seek new partners who can provide benefits
necessary for competitive advantage in the new
environment. Following such events, the entire net-
work is in considerable flux as firms strive to
attain network positions that will be effective in
the changed environment.
Focusing on industry events as occasions for
environmental change as a key driver affecting net-
work change also highlights the need for firms
to achieve a balance between exploration and
exploitation in order to be consistently success-
ful. As Levinthal and March (1993) suggest, an
overemphasis on either one could lead to dete-
rioration in competitive advantage. Their logic
suggests that following an environment-changing
event, firms would be better off following an
exploration orientation. As the change stabilizes,
firms should exploit the new learning acquired
when the environment was in flux. More impor-
tantly, such an approach leads to the perspective
that industry environments differ not in terms of
whether they emphasize exploration or exploita-
tion types of learning, but in terms of when either
type of learning is more appropriate. It thus places
a premium on firms to (re)design their network
positions to fit the new environmental context if
they are to enhance performance.
As we observed earlier, firms that are promi-
nently positioned in the current network are un-
likely to go beyond their existing ties to seek
out novel information even when the environment
changes, which might be inappropriate given that
firms pursuing prominence in the network design
Copyright 2008 John Wiley & Sons, Ltd.
their network with a view to reinforcing their
competitive advantage. By definition, however,
environment-changing events change the existing
bases of competition. Firms that were prominent
prior to the environment-changing event are likely
to be adversely affected by this shift in the environ-
ment. Much of the information from their existing
ties may lose its relevance in the new environ-
ment. Because it is built around existing tech-
nologies and routines, such a position limits the
extent to which the firm can change its direc-
tion and strategy. Instead of forming relationships
with new and diverse partners, prominent firms
are likely to respond to this uncertainty by rein-
forcing their existing network by forming more
ties within their existing network partners, which
further negatively affects their competitive posi-
tion. Uzzis (1996) study highlights this paradox
of such a position that on the one hand provides
fine-grained information for exploitation, but on
the other hand could result in adverse effects if all
the ties in the firms network comprise similar ties
that do not provide diverse information. Recent
criticisms of the dysfunctional effects of social
capital (Locke, 1999) have similarly focused on
the negative consequences of firms getting locked
into their existing relationships.
Firms that are entrepreneurially positioned are
ideally positioned to take advantage of the shift
in the bases of competitive advantage. Not only
are their networks designed to secure nonredun-
dant information, they are explicitly designed to
take advantage of diversity within their network,
which enables, as we noted earlier, novel combi-
nations and recombinations of knowledge in the
network. Such explorations into new technology,
routines, new offerings, and markets enable firms
in an entrepreneurial position to take advantage of
the opportunities provided by the changed environ-
ment. It thus enables them to more effectively com-
pete in the new environment resulting in enhanced
performance. Thus:
Hypothesis 1: Following an environment-chang-
ing event, firms that are more prominently posi-
tioned in the interfirm network will exhibit lower
relative performance.
Hypothesis 2: Following an environment-chang-
ing event, firms that are more entrepreneurially
positioned in the interfirm network will exhibit
higher relative performance.
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Firm level of analysis contingency: firm
strategy
The alliance strategy of a firm constitutes an
important component of a firms strategy. The type
of alliances, the criteria to choose partners, the tim-
ing of the alliances, and the relationship process
affecting the alliances so formed are driven by the
firms objectives and strategies. In the steel indus-
try for instance, alliance activity clearly reflected
firm goals and objectives. Thus control of raw
materials drove the mining ventures of the fifties,
technology needs led to a rash of technical assis-
tance agreements through the early eighties and
market access needs drove the United States-Japan
alliances thereafter in the late eighties. If a firm
is to enhance competitive advantage, the type of
network position that managers design should be
in consonance with its overall strategy. Any mis-
match may have a detrimental effect on firm per-
formance. A firms strategy is thus an important
contingency factor.
To specify the directional hypotheses for the
interacting effect of firm strategy, we classified
firm strategy in terms of the Miles and Snow
typology. Miles and Snow (1978) distinguished
between three types of firm strategies: Analyzer,
Prospector, and Defender. The effectiveness of
these strategies depends on internal consistency
and fit between the different structural, contex-
tual, and strategic factors of the organization
(Doty, Glick, and Huber, 1993). Several stud-
ies have adopted this contingency argument to
study the effectiveness of these strategies. Ham-
brick (1983), for instance, examined the effective-
ness of these strategies under differing environ-
ments and concluded that defenders were more
likely to be successful in stable environments.
Miller (1988: 239) developed what he termed
technology-strategy gestalts as a way of exam-
ining the effect of fit between technology and
strategy on firm performance. Snow and Hrebiniak
(1980) found that only firms whose strategies were
accompanied by appropriate competences exhib-
ited higher performance. In the context of this
study, adopting the Miles and Snow typology to
test for the interacting effect of the network posi-
tion and strategy on firm performance is thus con-
sistent with the approach adopted by prior research
studies.
Most studies have viewed these three strate-
gies as forming a continuum with defender and
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 645
prospector on either end of the continuum with
analyzers in the middle (Miles and Snow, 1978;
Doty et al., 1993). During the time period of our
study, firms in the steel industry were consid-
ered to be relatively conservative (Hogan, 1991).
As such, prospector-like activity was limited and
as we will demonstrate below, most firms pur-
sued either an analyzer or defender strategy. We
thus frame our strategy hypotheses on the ana-
lyzer strategy, implicitly recognizing that defender
strategies are represented by our operationalization
of firm strategy.
Analyzers have been defined as a unique com-
bination of the [p]rospector and [d]efender types
(Miles and Snow, 1978: 68). Analyzers typically
service a firms stable base of traditional products
and customers while simultaneously locating new
product and market opportunities that are closely
related to its existing technological base. In this
respect, analyzers are like defenders in that a sig-
nificant portion of their revenues is based on serv-
ing a stable product market. However, they operate
in a few more product markets than the defenders,
resulting in a broader scope than defenders (Doty
et al., 1993). In addition to their core technology,
they have other technologies that enable them to
serve additional products and markets. Thus, ana-
lyzers are likely to be more diversified than defend-
ers. However, they are unlike prospectors in that
they rarely are the first movers into these markets
nor are they likely innovators of new technologies.
As Miller (1988) pointed out, they are more likely
to enter these markets or adopt new technologies
only after they are well established. Examples of
analyzers are Japanese integrated steel firms. They
appear to be more analyzer-like because apart from
producing traditional steel products and structural
steel using continuous casting technology, they
have expanded into related services that include
steel consulting in the emerging markets. In addi-
tion to servicing their traditional domestic mar-
kets, they have moved internationally to service
Japanese auto transplants in the United States and
the European Union.
Firms following an analyzer strategy require
frequent and, more importantly, reliable industry-
specific information flow that results from being
prominent in their network. Prominence in the
network enables them to exploit their existing
technological base, resulting in significant opera-
tional efficiencies because competitive advantage
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646 B. R. Koka and J. E. Prescott
partially lies in the heavy exploitation of exist-
ing technology. Such firms require specific, reli-
able information from others whose competitive
advantage is also based on similar technology in
order to drive down operating costs (Von Hippel,
1988). Critical for the flow of such information is
the need for multiple durable relationships char-
acterized by strong interdependence between the
partners.
Analyzers also expand into new products and
markets that arise out of leveraging opportuni-
ties created by their existing technological base.
Given their reluctance to move into markets and/or
technologies as a first mover, being more promi-
nent provides them with reliable information and
knowledge that reduces uncertainty. More impor-
tantly, such a position enables them to actively
shape the creation of new knowledge that opens
up markets and products for their new partners.
For instance, in the steel industry, integrated firms
partner with other integrated firms in order to
develop lighter steel materials that could com-
pete with plastics and aluminum, thereby expand-
ing their markets with the automotive and appli-
ance industry. Such a position enables firms to
offer broader product/market offerings, which in
turn enables additional relationships with cur-
rent and new partners and establishes a more
prominent position that results in higher perfor-
mance.
Establishing a prominent position however may
not be appropriate for a defender as compared to
an analyzer. Defenders focus on a narrow por-
tion of the market. They typically have a sin-
gle core technology that they pursue in order
to achieve competitive advantage. American min-
imills with electric arc furnace-based technology
and integrated steel mills with batch-processing
technologywith their focus on structural steel
products and the American marketcan thus
be classified as pursuers of a defender strategy.
While a few close ties leading to exploitation
of existing technology is important for such a
strategy, defenders in comparison with analyz-
ers need fewer ties because their focus is on a
smaller segment of the market. Efficiency of oper-
ations includes efficiency in terms of the number
of collaborative ties necessary to enhance perfor-
mance. Thus, firms that are pursuing a defender
strategy are likely to be adversely affected if
they design their networks in pursuit of network
prominence.
Copyright 2008 John Wiley & Sons, Ltd.
Hypothesis 3: Firms pursuing an analyzer strat-
egy and an alliance structure characterized by
network prominence will exhibit higher rela-
tive performance than firms pursuing a defender
strategy.
Emphasizing the dysfunctional effect of an
entrepreneurial position in the network leads us
to argue that firms that pursue a defender strat-
egy may exhibit lower relative performance if
they design alliance structures that provide them
with a large amount of unique and diverse infor-
mation. Being highly entrepreneurially positioned
provides firms the advantage of getting unique
information from different parts of the network
that are more suitable for firms that are prospectors
and the prospect-like areas of the analyzer strat-
egy (Miles and Snow, 1978). As Miles and Snow
(1978) argue, prospectors operate in a wide range
of environmental conditions. They seek to avoid
commitment to a single technological process and
attain growth by exploring new product and market
opportunities. Their strategy involves exploration-
based learning in their pursuit of growth and prof-
itability. As Rowley et al. (2000) argue, firms with
sparse networks are ideally suited for exploration-
related activities because they are able to bridge
information from diverse parts of the network.
Firms that are entrepreneurially positioned are
thus ideally positioned to pursue a strategy that
enables them to take advantage of the diverse
information such a position provides. However,
as noted earlier, the steel industry does not con-
tain many firms pursuing a prospector strategy.
In terms of framing the hypothesis for analyzers,
the question then becomes: how much diversity
do analyzers need if they are to enhance perfor-
mance? Since analyzers also operate in a broader
range of markets, technologies, and products than
defenders, this argument can be extended to tenta-
tively argue that analyzers that are entrepreneuri-
ally positioned get the benefits of diversity of infor-
mation that enable them to access new markets
and technologies, resulting in higher performance.
Thus,
Hypothesis 4: Firms pursuing an analyzer strat-
egy and an alliance structure characterized by
an entrepreneurial position will exhibit higher
relative performance than firms pursuing a
defender strategy.
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DOI: 10.1002/smj

The interaction of the two different positions
Our final hypothesis examines the interaction bet-
ween the two network positions.1 While these
two network positions are analytically distinct in
terms of the mechanisms that provide benefits,
both positions draw on the same network structure
to provide these different benefits. Consequently,
every firm has some level of both prominent and
entrepreneurial benefits in the network. In other
words, these two positions are not mutually exclu-
sive with firms varying in terms of the degree to
which they pursue either or both simultaneously.
However, given that different processes are neces-
sary to access the benefits that accrue to the firm
for each position, it is important to examine the
consequences to firms if they maintain high levels
on both positions simultaneously.
The logic for each position was developed ear-
lier and need not be repeated here. However, given
the difference in the nature of skills and capabil-
ities necessary to benefit from these positions, it
is unlikely that firms can possess high levels on
both of these capabilities simultaneously. As pro-
ponents of the resource-based view and learning
theory (March, 1999) argue, it is difficult for firms
to gain expertise at both of these different skills
and capabilities. More importantly, pursuing the
different skills and capabilities may actually lead
to a dilution of their efforts resulting in poor per-
formance. Thus,
Hypothesis 5: Firms that are simultaneously
both more prominent and entrepreneurially posi-
tioned in the network relative to other firms will
exhibit lower relative performance.
The distinction between Hypothesis 5 and the
previous hypotheses related to analyzers is impor-
tant because it highlights that context matters.
Hypotheses 3 and 4 propose that firms that put
emphasis either position will experience higher
performance only if they are pursuing an analyzer
strategy. Hypothesis 5, on the other hand, proposes
that putting emphasis on both positions will lead
to lower performance if it is achieved irrespective
of context.
1
We thank an anonymous reviewer for encouraging us to
develop this hypothesis.
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 647
RESEARCH METHODOLOGY
We tested our hypotheses using longitudinal allian-
ce data in the global steel industry. Since the eight-
ies, the global steel industry has witnessed sub-
stantial alliance activity. Licensing and technical
agreements enabled the transfer of technology and
best practices. Joint ventures facilitated reductions
in capacity by consolidating operations and plants.
In addition, alliances enabled firms to overcome
the barriers imposed by cross-regulatory borders.
Alliances thus emerged as a significant component
of steel firms strategy to manage the compet-
itive dynamics (Madhavan et al., 1998), making
this industry an appropriate arena in which to test
our hypotheses.
Data
Our analysis focuses on a population of strate-
gic alliances formed in the steel industry between
19801994.2 Consistent with the definition in the
literature, we identified alliance as any durable
collaborative activity that involved exchange of
resources between firms (Ahuja, 2000b). All steel
industry firms that had formed at least one alliance
during the time period of this study19801994
were included in our database. The American
Metal Market (AMM ), which is the major trade
journal of the steel industry, was our primary data
source. We examined daily issues of the AMM
spanning all 15 years for our data collection pur-
poses.3 We collected information on 706 alliances
formed between 422 firms from 48 countries; 162
of which operated in the steel industry. Apart
from information on the partners, we also col-
lected data on the start dates of the alliances,
their end dates (if they were terminated), purpose,
and alliance structure. We used this data to cre-
ate alliance networks and matrices for each year,
which were then utilized to operationalize the net-
work constructs. Since we had end dates for sev-
eral alliances, our network matrices for every year
2
We draw on Koka and Prescott (2002) in our description of the
data and methodology.
3
We used multiple data sources in order to ascertain the accuracy
of our database. These include the Metal Bulletin, Dow Jones
Retrieval Index, Annual Reports of various firms, several Steel
Industry Monitoring Reports published by the United States
International Trade Commission. In addition we drew on two
books published on the steel industry (Mangum, Kim, and
Tallman, 1996; Hogan, 1991) to ascertain the accuracy of our
data.
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj
648 B. R. Koka and J. E. Prescott
included only alliances that were active in that
year. Forming year-wise matrices was necessary
to create a panel dataset that enabled a year-wise
test of the hypotheses. Such a strategy allowed us
to test whether our theory holds across time, and
was particularly useful in testing the environmental
change hypotheses.
We followed Nohria and Garcia-Pont (1991) in
assigning a numerical score to each alliance that
reflected the intensity of cooperation and there-
fore the interdependence of partners on a 10-point
scale. Higher scores indicate higher levels of inten-
sity of cooperation and interdependence, indicating
a potential for a greater amount and a higher qual-
ity of information flow than alliances with lower
scores. In addition, higher interdependence reflects
the potential for the partners to engage in coordi-
nated action that involves considerable mobiliza-
tion of resources, which as we pointed out earlier
is a significant aspect of the strategy of the promi-
nent firms in the network. Where pairs of partners
had multiple alliances with each other in a year,
we added the individual scores of each alliance to
form a composite index. Coding alliances along
these lines enabled us to incorporate interdepen-
dence between the partners into our analysis.
Operationalization of constructs
In line with our argument that network positions
should be operationalized using multiple indica-
tors, and in order to capture the different aspects
of the network constructs, we developed several
measures to arrive at a composite variable for each
construct.
Network prominence (PROMIN)
We identified three measures to operationalize net-
work prominence. Theoretically we argued that
firms that pursued a prominent position in the net-
work tended to occupy a central position therein.
Of the many network measures that have been
utilized to capture the notion of centrality, the
eigenvector-based measure of centrality (CEN-
TRAL) is particularly apposite (Bonacich, 1972).
First, it is a status measure of the firm (Podony
et al., 1996). As we argued, affiliation with more
prominent firms is desired because of legitimacy
benefits. Second, this measure of centrality takes
into account the strength of ties between the part-
ners, which is an integral aspect of a prominent
Copyright 2008 John Wiley & Sons, Ltd.
position. Stronger ties reflect the potential for inter-
dependence and capability for coordinated action
between the partners. Finally, Bonacich centrality
is calculated as the weighted sum of the central-
ities of the firms partners. It captures the extent
to which the firm is connected to the other cen-
tral firms, enabling us to evaluate the influence of
the firm to establish the nature of the competitive
dynamics in the industry, while simultaneously
providing us with the extent of access that the firm
has to the industrys information and resources. We
used the network adjacency matrix to calculate this
measure using the UCINET V software program
(Borgatti, Everett, and Freeman, 1999). In addi-
tion we operationalized network prominence using
a count measure of the number of partners (PART-
NER) a firm had in each year. This measure is a
simple indicator of the size of the firms network
(Uzzi and Gillespie, 2002) and measures the num-
ber of other firms in the network with whom the
firm has direct ties. Finally, we used a count mea-
sure of the number of ties (TIES) that the firm had
in each year. PARTNER is the number of partners
with whom the firm had at least one tie. TIES on
the other hand, is the number of direct ties that
a firm had with all its partners, and is designed
to capture the multiple ties that a firm may enjoy
with certain of its partners. Apart from acting as
indicators for the potential for resource flows to
the focal firm, all three of these measures provide
a means of determining the extent of influence that
the firm has in the overall network.
Entrepreneurial position (ENTREP)
Entrepreneurial position was operationalized using
the network measurestructural holes (Burt,
1992). As noted in the theory section, firm net-
works that have many structural holes indicate that
the partners are relatively unconnected to others
in the network. We calculated this as a constraint
measure (HOLES) (Burt, 2000) using UCINET V.
High constraint indicates that the firms partners
are densely connected to one another with high
redundancy in information flow. A low constraint
measure on the other hand indicates a sparsely
connected network. We also developed two other
measures to reflect the diversity in the structure
of the alliance network: the first measured the
diversity of the partners in terms of their national-
ities; the second reflected the diversity of the part-
ners in terms of six technology groupsIntegrated
Strat. Mgmt. J., 29: 639661 (2008)
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Steel, Specialty Steel, Minimill, Downstream (to
the steel industry), Upstream, and Others (Koka
and Prescott, 2002; Madhavan et. al., 1998). We
then operationalized both diversity measures using
Blaus heterogeneity index. A high heterogeneity
index indicates high diversity in terms of nation-
ality/technology of the partners.
Blaus heterogeneity index 1 !Pj 2 ;
where Pj is the proportion of partners in the j
category.
Thus, we had two heterogeneity index mea-
suresnationality heterogeneity index (COUN-
TRY) and technology heterogeneity index (TECH)
to indicate the diversity in the structure of the
alliance network.
The descriptive statistics (Table 1) reveal signif-
icant correlations between the measures.
As we argued, both types of network positions
draw on some aspect of network structure and is
therefore not very surprising. The magnitude and
the direction of the correlations are as anticipated.
Thus, network prominence (PROMIN) measures
are all correlated with each other as expected.
The count number of ties (TIES) has a high
correlation to centrality (CENTRAL) (0.89; p <
0.01) and count measure of partners (PARTNER)
(0.96; p < 0.01). Similarly, PARTNER and CEN-
TRAL are also correlated (0.78; p < 0.01), provid-
ing evidence that they measured the same under-
lying component indicating a convergent valid-
ity. Further support for the convergent validity
can also be discerned from the correlations for
the entrepreneurial position (ENTREP) measures.
Technology heterogeneity (TECH) and country
heterogeneity (COUNTRY) are, as expected, high-
ly correlated with the HOLES measure (0.78,
p < 0.01; 0.78, p < 0.01 respectively)4 and with
each other (0.77; p < 0.01). Additionally, there is
discriminant validity. TECH and COUNTRY are
less correlated with CENTRAL (0.38, p < 0.01;
0.28, p < 0.01 respectively) and the other network
prominence measures.5 Finally all the measures
4
The negative correlations reflect the way we operationalized the
variables. A high TECH and COUNTRY measure indicates high
entrepreneurial position just as a low HOLES measure indicates
high entrepreneurial position.
5
An issue here is the correlation between the constraint mea-
sure for structural holes (HOLES) and the prominence position
measures CENTRAL (0.46; p < 0.01) and PARTNER (0.70;
p < 0.01). The correlations indicate that ego network density,
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 649
are significantly correlated in the same direction
indicating that they are all indicators of a similar
construct. There is thus considerable face validity
for these measures.
We conducted a principal components factor
analysis with varimax rotation to develop a com-
posite measure for each of the position constructs.
As expected, the six measures loaded onto two
factors. The two-factor model was consistently
supported on a variety of criteria such as eigen-
values (>than 1), variance explained, and factor
loadings.6 We utilized the factor scores developed
from the above analysis as a composite measure for
each of the network position constructs. In addi-
tion, these measures were then utilized to develop
the interaction variables.
Performance
Based on discussions with several steel industry
analysts at World Steel Dynamics and Prudential
Securities, we operationalized our dependent vari-
able firm performance as Sales per employee in
constant US dollars (PRODUCTIVITY). We used
this measure for several reasons. First it is consis-
tent with the way productivity has been measured
at the macroeconomic level (output/man hour).
Second, prior research on the steel industry (Nair
and Kotha, 2001; Koka and Prescott, 2002) has
used sales per employee as a measure of produc-
tivity. It also provides a measure of the efficiency
of the firms operation7 which has been the driving
concern of many firms in the steel industry (Ghe-
mawat, 1993). Finally, differences in accounting
practices prevent us from utilizing accounting mea-
sures of performance given that our data includes
firms from over 40 countries. Thomson Financials
Worldscope database was our main source for the
number of ties, and centrality are interrelated. The high cor-
relation between HOLES and PARTNER can be explained by
examining the operationalization. HOLES calculates if the part-
ners of a firm are themselves connected to one another. Thus,
a firm can have many partners who are unconnected among
themselves leading to a high entrepreneurial position with high
nonredundancy and therefore low constraint to the firm. A lower
correlation with CENTRAL can be attributed to the fact that
CENTRAL, on the other hand, depends on relations between
the partners because it is a based on partner centrality.
6
The results of all these analyses are available from the first
author.
7
Ideal performance measures for the steel industry are typically
based on steel tonnage. Thus, a better productivity measure
would be tonnage per employee. However, tonnage details were
not available for all the firms for all the years on a consistent
basis.
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj
 Copyright 2008 John Wiley & Sons, Ltd.

650
B. R. Koka and J. E. Prescott
Table 1. Descriptive statistics and correlations

Mean Deviation 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1 Eigen centrality 8.50 16.20 1.00 0.78 0.89 0.46 0.38 0.28 0.94 0.13 0.01 0.002 0.095 0.29 0.29 0.34
2 Partners 8.34 9.3 1.00 0.96 0.70 0.56 0.5 0.87 0.41 0.09 0.015 0.05 0.175 0.455 0.28
3 Ties 12.83 17.88 1.00 0.6 0.5 0.42 0.95 0.3 0.08 0.015 0.06 0.25 0.413 0.32
4 Structural holes 0.49 0.33 1.00 0.78 0.78 0.39 0.85 0.09 0.08 0.08 0.09 0.585 0.26
5 Tech. heterogeneity 0.374 0.272 1.00 0.77 0.26 0.88 0.01 0.09 0.23 0.06 0.644 0.37
6 Country heterogeneity 0.42 0.287 1.00 0.14 0.92 0.015 0.1 0.20 0.14 0.601 0.43
7 Network prominence 0 1 1.00 0 0.048 0.02 .151 0.32 0.23 0.50
8 Entrepreneurial position 0 1 1.00 0.03 0.11 0.24 0.209 0.623 0.54
9 Legislative changes 0.25 0.43 1.00 0.38 0.027 0.19 0.08 0.034
10 Technology changes 0.3 0.46 1.00 0.014 .122 0.16 0.066
11 Strategy 0.05 0.11 1.00 0.231 0.384 0.32
12 Performanceproductivity 0.28 0.21 1.00 0.416 0.188
13 Firm sizeemployees 9.09 1.288 1.00 0.242
14 Interaction of prominence and 0.00 0.462 1.00
entrepreneurial

- p < 0.01; p < 0.05; n = 585
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performance data. We supplemented this informa-
tion by drawing on annual reports of the various
firms.8 We lagged the performance variable by
one year in our analysis, which is consistent with
the use of a productivity measure since efficiency
improvements are likely to have an immediate
impact. We also conducted the analysis with a two-
year lag that produced consistent, but not as strong,
results.
Contextual and control variables
Environmental Change
Consistent with our theoretical arguments, we drew
on an events-based classification scheme to oper-
ationalize environmental change. Industry events
change the competitive dynamics, which forces
firms to jockey for position in the network in order
to acquire capabilities necessary to compete. Dur-
ing the eighties the steel industry was buffeted
by two key industry events. First were a series
of legislative acts in 1984, such as the Voluntary
Restraint Agreements (VRAs) between the United
States and the steel industries of the European
Union and Japan, and the relaxation of antitrust
laws, which enabled mergers between domestic
steel companies such as the LTV-Republic steel
merger and set the stage for new competitive
actions in the industry (Madhavan et al., 1998). A
second key event was the technology breakthrough
spearheaded by Nucor in 1987 (Madhavan et al.,
1998; Ghemawat, 1993). This event introduced
the Compact Strip Casting (CSC) technology that
enabled Nucor and other minimills to enter the flat
steel segment of the market.
Both of these events spurred several strategic
actions by incumbent firms as firms jockeyed to
attain favorable positions. The VRAs forced for-
eign firms to form alliances with U.S. firms so they
could supply the United States-based Japanese auto
transplants. The relaxation of the antitrust laws
enabled U.S. firms to form technology alliances
with firms from Europe and Asia in order to access
continuous casting technology. It also inspired a
series of consolidations and restructuring both in
the United States and Europe. Such dynamics were
8
We adjusted for currency differences. We converted all the
figures into U.S. dollars using the exchange rate between the
U.S. dollar and the foreign currency prevailing as of 30 June
each year. We also adjusted for inflation by developing constant
price measures with the year 1991 as a base.
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 651
given a further impetus by the introduction of CSC
technology. By lowering the capital costs for set-
ting up a new plant, CSC technology changed the
industry structure because it brought new compe-
tition to the integrated steel mills in the form of
minimills (Ghemawat, 1993). These events thus
engendered disequilibrium in the environment in
the eighties making them a good context to test
our hypotheses over time.
We developed two variables to separately test
for the effects of each of the two events in order
to test for the contingency effect of environmen-
tal change. In line with our argument that these
events change competitive dynamics, we exam-
ined the effect of network position on firm per-
formance in the period immediately following the
events. For the legislative event, we created a
dummy variable (SRYEAR) that took the value
of 1 for the years 1984, 1985, and 1986 and 0
otherwise. Extending the effect of the legislative
acts for a period of three years was a judgment
based on prior studies (Madhavan et al., 1998).
For the technology event, we created a dummy
variable (SLYEAR) that took the value of 1 for
the years 1987, 1988, and 1989 and 0 otherwise.
Extending the effect of this event for a period
of three years was again based on prior research,
industry knowledge, and the desire for consistency
with the SRYEAR variable. We developed four
interaction variablesPROM8486, PROM8789,
ENTR8486, and ENTR8789as a product of
these two variables, and two network position
variablesPROMIN and ENTREPto test for
the interaction effect of environmental change
and network position on firm performance. Thus,
Hypotheses 1 and 2 were tested twice; once with
the legislative event and a second time with the
technology event. Testing our hypotheses over two
change events not only produced a more robust
test of our hypotheses but also helped us explore
the question of whether the benefits of network
positions are stable over time.
Since the dummy variables created above were
judgment calls based on our understanding of the
industry and prior research, we conducted addi-
tional validity checks. We tested for the interaction
effect of each of the years in the data and the net-
work position measure and examined their effect
on firm performance. The results are consistent
with the other operationalization, which we discuss
in the results section.
Strat. Mgmt. J., 29: 639661 (2008)
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652 B. R. Koka and J. E. Prescott
Firm strategy
We operationalized an analyzer strategy in two dif-
ferent waysfirst, as a categorizing variable and
second as a continuous measure. We ran different
analyses using the two different measures to test
our hypotheses in order to test for the validity and
robustness of our results.
Categorizing variable as an indicator for strategy
Prior research studies have typically operational-
ized the Miles and Snow typology by cluster
analyzing firms on a number of organizational
attributes. We adopted a similar approach by clus-
ter analyzing firms on six organizational measures.
Two measuresproportion of sales in the steel
industry and proportion of international sales
measured the breadth of an organizations oper-
ations (Doty et al., 1993). We also developed two
measures that addressed diversification: the num-
ber of product segments in the steel industry that
the firm operated in and the number of two-digit
SIC codes that it operated in. Since efficiency
is another attribute that distinguishes between the
strategies, we classified firms in terms of whether
they used continuous casting technology. Finally,
we used the size of the firms as an indicator
of administrative complexity (Doty et al., 1993).
Given the conservative nature of the industry, as
discussed earlier, we accordingly tested for a two-
cluster solution. The means for the first cluster for
proportion of steel sales was 0.76 as opposed to
0.93; for the second cluster, proportion of inter-
national sales was 0.30 as opposed to 0.17. Firms
in the first cluster had adopted continuous cast-
ing technology, they also operated in three steel
segments as opposed to one steel segment for the
second cluster. Firms in the first cluster operated
in three industries (at the two-digit SIC level),
while those in the second were limited to one
industry. Finally, the firms in the first cluster were
larger with an average employee size of approxi-
mately 20,000 as opposed to 2,400 for firms in the
second cluster. Thus, there is considerable valid-
ity to argue that firms in the first cluster were
following an analyzer strategy given their broad
product market scope, some diversification, focus
on efficiency, and larger size. The second clus-
ter seemed to comprise firms following a defender
strategy given their focus on narrow product mar-
ket scope and relatively little diversification. We
Copyright 2008 John Wiley & Sons, Ltd.
did this analysis for two years (1986 and 1991)
to examine both the stability of memberships in
the clusters as well as the reliability of the clus-
ters. Memberships within the clusters as well as
the means remained largely similar for both years,
providing more validity for the measures.
Utilizing a dichotomous approach to testing the
hypotheses has two issues. First, a dichotomous
approach makes the implicit assumption that all
firms are similar in terms of how they are pursu-
ing a particular strategy. Differences between firms
in terms of their distance from an ideal type are
masked by taking a dichotomous approach. This is
an important issue given that our theoretical argu-
ments are based on degrees rather than an absolute
level. Second, utilizing a time invariant variable to
characterize a firms strategy leads to collinearity
problems with the use of the firm as a dummy
variable (to control for unobserved heterogeneity),
which is another time invariant variable resulting
in two constants in the panel regression methodol-
ogy. We accordingly developed a continuous mea-
sure for testing the hypotheses in this study that is
a subset of the above measures, and demonstrated
that the two operationalizations are highly related.
Continuous strategy measure (STRG)
We had argued that analyzers would have a mix
of business with large exposure to one product
market domain but with significant presence in
other domains. That is, an analyzers focus is on
a broader product market scope. We thus opera-
tionalized firm strategy in this context as a com-
posite measure of two ratios. The first measures
the proportion of sales in the steel industry to the
total sales for each firm. Firms pursuing an ana-
lyzer strategy were likely to service markets other
than steel. As indicated earlier, most steel firms
seemed to sell products that were related to the
steel industry. Ranging from 0.28 to 1, the mean
of this measure for the dataset was 0.85. The sec-
ond measure is the proportion of domestic sales to
total sales for each firm. Much of the sales in this
industry seem to be directed to the domestic mar-
ket. Though this measure ranged from 0.0648 to 1,
the mean of this measure was 0.78. We reversed
the two measures and then multiplied the two ratios
to arrive at a composite measure of firm strategy
(STRG) that ranged between 0 and 0.67. The mean
for this measure was 0.05. Firms with scores closer
to 1 indicate that they are pursuing an analyzer
Strat. Mgmt. J., 29: 639661 (2008)
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strategy. It is pertinent to point out that a score
around the mean of 0.05 indicates a firm is fairly
well diversified because it means that on the aver-
age, at least one-fourth of the total sales of the firm
is directed to markets outside of the steel industry
and/or the domestic market. We developed a com-
posite measure using factor analysis of the two
different measures as the analysis indicated that
there was only one factor. The correlation of that
factor score with STRG was 0.96. We conducted
the analysis for each of the measures separately.
The results were stronger and consistent for the
proportion of sales in the steel industry measure
than for the geographic measure.
We compared this measure with the category
variable. First, the nonparametric correlation was
0.55 (p < 0.001), indicating that the two measures
were largely similar. Second, we calculated the dif-
ference in means between the two clusters on the
continuous strategy measure (STRG). The mean
for STRG for cluster one was 0.08 and 0.001
for cluster two (difference of means significant
at p < 0.001), supporting our argument that firms
that were higher on STRG were following an ana-
lyzer strategy. Third, we tested for the strategy
hypotheses using both the continuous and categor-
ical measure and found similar results (which we
report in the results section). All these reasons give
us confidence in terms of the reliability and validity
of the measures that we used for operationalizing
firm strategy.
We report the results based on STRG. We cal-
culated each measure using data from World-
scope. We used information from Annual Reports
if the information was not available from World-
scope. We again developed two interaction vari-
ablesPROMSTRG and ENTRSTRGas a pro-
duct of the strategy variable STRG and the position
variables PROMIN and ENTREP.
Interaction of network prominence and the
entrepreneurial position
We calculated this variable (PROMENTR) as a
product of the two position variables PROMIN and
ENTREP.
Firm size
We included firm size as a control measure to
test the alternative hypotheses that size affects
productivity. Firm size was operationalized as the
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 653
natural logarithm of the total number of employees
(LNEMP).
All the above measures were calculated for each
firm for every year they were in the network to
enable the longitudinal testing of our hypotheses.
Analyses
To test the hypotheses, we used a two-way fixed
effects panel regression model. A fixed effects
panel model enabled us to test the validity of
our theory over time. It also addresses the issue
of serially correlated errors that could otherwise
affect the results validity. In addition, fixed effects
controls for unobserved heterogeneity within firms
by introducing a dummy variable for each firm
in the regression equation (Greene, 1993). The
dummy variable controls for all other unobserved
and unknown time-invariant and firm-specific fac-
tors. It is quite likely that using the firm as a
control variable may lead to inconclusive results
for the main hypotheses of this study because it
may capture all of the variance in performance. In
that sense, using a fixed effects model may be a
conservative test of the hypotheses. To the extent
that the hypothesized variables are significant, we
argue that it provides strong support for the validity
of the results as well as the theoretical logic under-
lying it. In addition to controlling for firm effects,
we also controlled for time effects by introduc-
ing each year as a dummy variable. This variable
captures any variation in performance that is time-
specific that again provides for a conservative test
of the hypotheses. We conducted the fixed effects
test using the TSCSREG procedure in SAS.
We controlled for industry effects by restricting
the analysis to only firms from the steel indus-
try. From the 162 steel firms in the dataset, we
conducted the analysis on a sample comprising 70
steel firms with 585 observations over 11 years
(19831993). Even though we collected alliance
data from 19801994, we conducted the analysis
only for the 11-year period 19831993 in order
to address left-censoring issues. The choice of the
70 steel firms was based on three reasons. First, of
the 162 steel firms in the dataset, only 153 were
actively engaged in alliances between 19831993;
data availability issues, particularly for firms oper-
ating outside the Triad (Europe, North America,
and Japan), further restricted the number of firms
we could include in the sample; and the final
choice of 70 firms included the top 50 firms in the
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj
654 B. R. Koka and J. E. Prescott
steel industry from the chosen countries in terms
of sales turnover. Second, the choice of these 70
firms was also consistent with the current method-
ology in network studies that restrict their analysis
to a selected group of firms (Gulati, 1995; Ahuja,
2000a). Third, competitive dynamics among firms
from the Triad were more interdependent than with
firms from the other countries (Mangum et al.,
1996), indicating that much of the alliance activity
was concentrated among the firms in the sample.
To ensure that there was no bias in the validity
of the results, we conducted random effects model
analysis to test for the assumption that the 70 firms
were a random sample of the population. We found
results that were consistent with the fixed effects
model reported below, reinforcing our confidence
in the robustness of the results.
RESULTS
Table 2 provides the panel regression results. To
ensure clarity, we dropped the 69 firm dummy
variables and the 10 year dummy variables and
show only the parameter estimates, standard errors,
and significance of the coefficients of the main and
interaction variables. Model 1 tested for the main
effects of the two network position measures, the
contingency variables and size as a control vari-
able. Models 25 included the interaction effects
separately for the different contingency hypothe-
ses. Model 6 examined the effect of the complete
model with all the interaction effects in one model.
Model 7 gives the results for the complete model
and is similar to Model 6 except that the strategy
variable is a dichotomous variable based on the
cluster analysis described in the operationalization
section. Model 8 in Table 3 tested for the com-
plete model similar to Model 6, but replaced the
dummy environmental change variables with the
interaction variables for each year and the position
measures.
Since our interest is on the interactive effects
of the position and contingency variables, we
focus our discussion on them. The main effects
depicted in Model 1 for comparison purposes
provide preliminary support for the validity of
a contingency perspective for the effect of net-
work position on firm performance. As can be
seen across the different models in Table 2, there
is little consistency in terms of the magnitude
of the estimates and the direction for the main
Copyright 2008 John Wiley & Sons, Ltd.
effects of both position measures on firm perfor-
mance. On the other hand, the estimates for the
interaction variables are more consistent in signif-
icance, magnitude, and direction across the differ-
ent models, providing face validity for our argu-
ment. More importantly, the incremental change
in explained variance is significant for each of the
models, providing support for the importance of
the interaction variables in explaining firm perfor-
mance.
Hypothesis 1 predicted that following an envi-
ronmental change, network prominence would be
negatively related to performance, while Hypoth-
esis 2 predicted that firms pursuing an entrepre-
neurial position would exhibit higher performance.
As noted in our operationalization section, we
examined the interacting effects of two types of
environmental changethe legislative change of
1984 and the technology change of 1987on firm
performance to test these hypotheses. We discuss
each separately.
Legislative change
We find support for both Hypotheses 1 and 2 for
the interacting effect of environmental change trig-
gered by legislative events on firm performance
(Model 2 and Model 5). The interaction variable
(PROM8486) of network prominence (PROMIN)
and the period dummy variable (SR8486) is neg-
ative and significant. Similarly, the interaction
variable (ENTR8486) of entrepreneurial position
(ENTREP) and SR8486 is significant and posi-
tive. Thus, following an environmental change,
entrepreneurial position is positively related to firm
performance. Both these relationships continue to
be supported in the full model (Model 6), provid-
ing strong support for the contingency effect of the
environmental context on firm performance.
Technology change
The interacting variable for network prominence
(PROM8789) following a technology event is in
the expected direction, but not significant in Model
3 (Hypothesis 1). However when we examine
the full Model 6, Hypothesis 1 is strongly sup-
ported. Following the technology change, firms
that were prominent in the network experienced
adverse effects on firm performance. However, the
interacting variable for the entrepreneurial position
(ENTR8789) is significant and negative (Model 3).
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj
 Designing Alliance Networks 655
Table 2. Panel analysis results for productivity as the dependent variable

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

Main Hypotheses Hypotheses Hypotheses Hypothesis Full Full Model

Effects 1&2- 1&2 3&4 5 Interaction Model (Strategy as
Legislative Technology Strategy of the two dichotomous
Change Change positions variable)@

Intercept 0.904 0.858 0.892

0.76 0.8 0.899 0.866
(0.11) (0.105) (0.108)
(0.102) (0.106) (0.107) (0.10)
Firm size (LNEMP) 0.06 0.053 0.059
0.042 0.048 0.059 0.063
(0.014) (0.014) (0.014)
(0.013) (0.014) (0.014) (0.012)
Strategy (STRG) 0.613 0.403 0.560.61 0.99 0.496 0.034
(0.2) (0.19) (0.2) (0.2) (0.204) (0.2) (0.05)
Network prominence 0.053 0.04 0.058
0.013 0.006 0.068 0.023
(PROMIN) (0.011) (0.01) (0.01)(0.015) (0.014) (0.014) (0.029)
Entrepreneurial 0.01 0.002 0.0170.0008 0.007 0.003 0.002
position (ENTREP) (0.008) (0.007) (0.008)
(0.008) (0.008) (0.008) (0.01)
PROMIN YR8486 0.053 0.05 0.053
(PROM8486) (0.008)
(0.009) (0.006)
ENTREP YR8486 0.024 0.019 0.017
(ENTR8486) (0.007)
(0.007) (0.007)
PROMIN YR8789 0.008 0.014 0.023
(PROM8789) (0.006) (0.007) (0.006)
ENTREP YR8789 0.021 0.0123+ 0.017
ENTR8789) (0.007) (0.0068) (0.007)
PROMIN Strg 0.98 0.68 0.06
(PROMSTRG) (0.15) (0.16) (0.03)
ENTREP Strg 0.111 0.058 0.006
(ENTRSTRG) (0.054) (0.054) (0.013)
PROMIN ENTREP 0.055 0.027 0.044
(PROMENTR) (0.014) (0.014) (0.013)
YEAR EFFECTS Included Included Included Included Included Included
FIRM EFFECTS Included Included Included Included Included Included
R-SQUARE 0.905 0.915 0.908 0.913 0.908 0.923 0.248
F-value 56.7 62.33 57.15 60.77 57.4 64.88 69.1
Deg. Of freedom 501 499 499 499 500 494 573
"R-sq (from Model 1) 0.01 0.003 0.008 0.003 0.018
F-value for "R sq. 29.29 8.12 22.9 16.27 17.94

- p < 0.0001;
- p < 0.001;
- p < 0.01; - p < 0.05; +
- p < 0.1; - Random effects : Analyzer strategy = 1

This was unexpected because we had predicted
that such a position would positively affect firm
performance following an environmental change.
However, the results suggest that following a tech-
nology event, firms that were entrepreneurially
positioned also experienced adverse effects on per-
formance. In other words, following the technol-
ogy change, both network positions had an adverse
effect on firm performance.
We conducted additional analysis to understand
why the results differed between the two events.
We considered whether the difference was due to
the way we had operationalized our dummy vari-
able for the two events that assumed a three-year
window. Instead of using the window approach,
Copyright 2008 John Wiley & Sons, Ltd.
we conducted an alternative analysis that examined
the interacting effect of each year in the dataset
with the two position measures. The results are
depicted in Table 3 (Model 8). As can be seen,
the interaction variable for each year and net-
work prominence position is consistently signifi-
cant and negative throughout the analysis period.
This was consistent with our expectations and our
hypothesis that in environments in flux, firms that
had a prominent position in the network were
at a disadvantage regardless if the event was
legislative- or technology-based. That the steel
industry was experiencing massive restructuring
during this period has been the subject of many
studies (Madhavan et al., 1998; Mangum et al.,
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj
656 B. R. Koka and J. E. Prescott
Table 3. Panel analysis results for productivity as the deal with changing competitive dynamics. In other
dependent variable: full model with year-wise interacting words, such events were changing the bases of
variables
competition, which directly affected the promi-
Model 8 nent firms competitive position. Their existing
network, however, was unlikely to provide them
Estimates S.E with the information necessary to compete in the
new environment resulting in adverse effects on
Intercept 0.748 0.096
Firm size (LNEMP) 0.038 0.0125 their performance.
Strategy (STRG) 0.34 0.19 The results for the interacting effect of entrepre-
Network prominence (PROMIN) 0.033 0.015 neurial position with the individual years are
Entrepreneurial position 0.01 0.011 mixed. As predicted, the interacting variable was
(ENTREP) positive and significant in the first three years of
PROMIN 1983 0.112 0.015
PROMIN 1984 0.112 0.015 the analysis period, which was comparable to the
PROMIN 1985 0.089 0.014 period following the legislative change. Firms that
PROMIN 1986 0.08 0.014 were pursuing an entrepreneurial position in the
PROMIN 1987 0.05 0.013 network seemed to have positioned themselves to
PROMIN 1988 0.04 0.01 acquire the new information necessary to compete
PROMIN 1989 0.05 0.011
PROMIN 1990 0.023 0.011 in the environment following the legislative events
PROMIN 1991 0.028 0.01 of 1984. Such firms exhibited higher performance
PROMIN 1992 0.018 0.0095 in the years 1984 and 1985 immediately follow-
ENTREP 1983 0.049 0.014 ing the change. Following the technology change
ENTREP 1984 0.048 0.013 of 1987, however, an entrepreneurial position was
ENTREP 1985 0.034 0.013
ENTREP 1986 0.013 0.012 not significant in explaining firm performance. In
ENTREP 1987 0.007 0.012 sum, while our hypotheses were strongly supported
ENTREP 1988 0.009 0.012 for the legislative change, there was mixed support
ENTREP 1989 0.009 0.012 for the technology change.
ENTREP 1990 0.003 0.012 We looked to the literature to understand why
ENTREP 1991 0.005 0.013
ENTREP 1992 0.004 0.013 our predicted effect for an entrepreneurial position
PROMIN STRG (PROMSTRG) 0.38 0.15 differed for the two events. The answer seems to
ENTREP STRG (ENTRSTRG) 0.01 0.05 lie in the nature of the eventsin other words
PROMIN ENTREP 0.026 0.013 not all environmental changes are the same. The
(PROMENTR) legislative change of 1984 provided the impe-
YEAR EFFECTS Included
FIRM EFFECTS Included tus for a series of actions that emphasized the
R-SQUARE 0.937 benefits arising from an entrepreneurial position.
F-value 65.25 Restricting imports into the United States forced
Deg. Of freedom 478 Japanese and European firms to seek markets and
alliances in other parts of the world. It thus ben-

- p < 0.0001;
- p < 0.001;
- p < 0.01; - p < 0.05;
+ - p < 0.1
1996; Ghemawat, 1993). For instance, the top six
U.S. steel companies experienced reductions in the
workforce from approximately 100,000 employees
in the early eighties to about 20,000 employees
in the early nineties. This was part of a series of
restructuring that forced them to close obsolete
plants, acquire new technologies, and compete
in more value-added markets. In the European
Union, this period saw similar consolidation activ-
ity. The two events that we hypothesized thus were
symptomatic of the changing environment that cre-
ated pressures for new information necessary to
Copyright 2008 John Wiley & Sons, Ltd.
efited those firms that had formed alliances with
firms in markets such as China, Australia, South
Asia, and South America. In addition, the legisla-
tive change also spurred the formation of several
alliances between foreign and domestic firms in
the United States, such as those between U.S.
Steel and Kobe, and Armco and Acerinox. On the
one hand, the legislative change helped U.S. firms
acquire continuous casting technology, as well
as the process information necessary to increase
productivity and efficiency. It also helped them
enter markets for more value-added products such
as specialty steels. To the extent that knowledge
and information regarding continuous casting tech-
nology, opportunities regarding new products and
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj

markets, and changes in business practices existed
in the network, firms that were positioned to bene-
fit from diversity and unconnected networks exhib-
ited increased performance. Our results support
that conclusion.
However, the technology change was different
in that it was initiated by two firms, Nucor (a
minimill) and SMS Mannesman (a machinery sup-
plier), both of which had relatively little presence
in the erstwhile network. The new Compact Strip
Casting technology (CSP) signaled the entry of
minimills into the flat steel segment (Ghemawat,
1993: Madhavan et al., 1998). With a potential
to dramatically increase productivity to about one
man-hour per ton in comparison to the productiv-
ity of five man hours for the integrated steel plants,
such a technology event placed the integrated mills
at a significant competitive disadvantage. There
is little doubt that the technology change engen-
dered significant uncertainty for firms in the indus-
try. Adopting the new technology, however, was
not really an option for the firms since commit-
ments to existing technological bases, legacy costs,
and erstwhile labor practices prevented the inte-
grated mills from embracing the new technology.
By engendering an uncertainty that enveloped both
assessment and potential actions, the technology
change made the strategic options for the dominant
firms in the industry less clear. This would explain
why an entrepreneurial position was not signifi-
cant in affecting firm performance. Implicit in the
arguments underlying the entrepreneurial position
is the idea that all the information necessary to
compete in the industry is available somewhere
in the network, and thus a network position that
best accesses such information through nonredun-
dant and diverse ties is likely to be effective. Our
results suggest that there is limit to this argument.
More importantly, it suggests that there could be
limits to the information available in the network.
In other words, when events occur that are radi-
cal in nature and that are initiated by outsiders in
the industry, either network position may have lit-
tle effect on firm performance. More likely, they
could affect the firms negatively because they are
locked into the older technology base.
Firm strategy
We proposed that firm strategy would interact with
the network positions to affect firm performance
(Hypotheses 3 and 4). We hypothesized that for
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 657
firms pursuing an analyzer strategy, firms that were
more prominent would exhibit higher performance
(Hypothesis 3). The hypothesis was supported in
both Model 4 and Model 6 (the full model), as
can be seen from the significance of the interacting
variable PROMSTRG. Firms that pursue an ana-
lyzer strategy and that are more prominent in the
network exhibit higher performance. This is again
consistent with prior research. As Miles and Snow
(1978) pointed out, analyzers focus their efforts on
collecting information from a large and broad base.
They create administrative structures that enable
them to access information that reduce costs and
increase efficiencies. We also tested our Hypoth-
esis 4 that proposed that for firms pursuing an
analyzer strategy, entrepreneurial positioning pos-
itively affects performance. We found weak sup-
port for this hypothesis (Model 4) which becomes
insignificant in the full model (Model 6).
As indicated earlier, we also conducted the same
analysis using a dichotomous variable for firm
strategy as shown in Model 7. We found support
for Hypotheses 3, indicating that firms pursuing an
analyzer strategy exhibited higher performance if
they were more prominently positioned in the net-
work. In line with the earlier analysis, we found no
support for Hypothesis 4 that entrepreneurial posi-
tioning leads to higher performance for analyzer
strategies. We found identical results when we ran
separate analyses for the two clusters. Again firms
pursuing an analyzer strategy exhibited higher per-
formance if they were more prominently posi-
tioned.9
There may be three reasons for the weaker sup-
port for Hypothesis 4. First, it may be possible that
the moderate diversity that analyzers need could be
achieved through their relations with other analyz-
ers in the industry. Since most of the analyzers
were integrated steel mills, forming multiple rela-
tionships with other integrated steel mills increases
a firms prominent position while simultaneously
providing some diversity benefits because the mar-
ket offerings of these mills were similar. Sec-
ond, it may be argued that the hypothesis may
be better framed for prospectors than for ana-
lyzersentrepreneurial positioning may benefit
prospector firms more than analyzers. However,
examining our measures leads us to the conclu-
sion that the context of the steel industry prevented
us from testing that hypothesis. In the absence of
9
Results are available from the first author.
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj
658 B. R. Koka and J. E. Prescott
many conglomerates and innovators in this dataset,
we leave this hypothesis for future research. Third,
it may suggest that even for analyzers that put
emphasis on both positions, higher performance
may not result. This indicates the difficulty of
managing two distinct positions that require dif-
ferent capabilities. In this regard it reinforces the
results of Hypothesis 5 discussed below. Strong
and consistent results for both measures of strat-
egy enhances our confidence in the results. Not
only are the specific strategy hypotheses supported
in different analyses, we find that the effects of
other variables in the model are consistent both in
terms of their direction and significance. This indi-
cates that both the strategy variables have similar
effects raising our confidence in the robustness and
validity of the results.
The interaction of the two network positions
Finally, there is strong support for Hypothesis 5
that proposes that the interaction of the two net-
work positions will adversely affect firm perfor-
mance. The interacting variable PROMENTR in
both the individual Model 5 and the full Model 6
is negative and highly significant, providing strong
support for our argument that firms that are high
on both of these positions are likely to experience
adverse effects on firm performance. The results
suggest that firms have to make trade-offs in terms
of what position they want to achieve. If being high
on both positions results in high performance, the
prescription for managers is to form many ties with
many diverse partners that will then provide them
with the benefits of each position. Our results sug-
gest precisely the oppositethat the fit between
strategic context and network position is essential
for higher productivity. Managers need to be cog-
nizant of the strategic context in order to design the
most appropriate network position to enhance per-
formance. Overall the results provide strong sup-
port to a contingency theory of network structure
on firm performance.
CONTRIBUTIONS AND IMPLICATIONS
The network literature identifies and delineates that
firms pursue two different types of network posi-
tionsnetwork prominence and entrepreneurial
positions. We argue that these two network posi-
tions provide different benefits thereby implying
Copyright 2008 John Wiley & Sons, Ltd.
that they are likely to impact firm performance dif-
ferently under different contexts. We thus extend
conventional theory by asking: under what con-
text are different positions effective? We address
this pivotal question by developing contingency
hypotheses at two levels of analysis: environ-
mental change and firm strategy. In addition, we
examined the interaction of these positions on
firm performance. Our results provide support for
our hypotheses that different types of network
positions interact with environmental change and
strategic contingencies to impact productivity.
Our contingency findings support the call for a
strategic approach to the design and management
of strategic alliances. Since different information
benefits are derived from a firms set of alliances,
it is imperative that alliance managers strategi-
cally evaluate their information benefits and limi-
tations. That is, managers have multiple alliance
design choices. The strategic design of alliance
networks focuses managers attention on asking
questions such as: (1) what types of benefits do
we want from our alliance network; and (2) are
we interested in developing networks that allow
us to transfer tacit knowledge at the expense of
diversity, or are we more interested in developing
a set of nonredundant relationships that provide
us with diverse information but at a cost to effi-
ciency and exploitation? These types of trade-offs
are important considerations and, as our results
illustrate, have performance implications. Firms
are adversely affected if they try to extensively
do both, resulting in the need to make a conscious
decision regarding the nature and type of network
position they should pursue.
As we have illustrated, not only do differ-
ent types of network positions affect performance
differentially, these network positions adversely
affect performance if they do not fit contingency
requirements. Sometimes the dysfunctional effects
of network positions are more likely than the
positive effects. In other words, possessing the
inappropriate network position may have more
severe consequences than having the right posi-
tion. For example, we found that defenders that
are highly prominent in the steel industry alliance
network have lower relative performance. One lim-
itation of this study is the lack of prospectors
in our dataset. We cannot draw any conclusions
regarding the functional or dysfunctional perfor-
mance consequences of a prospector strategy with
an entrepreneurial position. It is worthwhile to
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj

extend our findings in an industry setting where
there are prospectors. Another fruitful area of
future research would be the examination of the
performance implications of adding, eliminating,
strengthening, and weakening a firms network
of alliances. Alliance researchers can look to the
stream of research in the valuation literature that
evaluates the impact of restructuring on market
value for guidance.
Our findings have implications for theory build-
ing. Following an environment-changing event,
there are limitations to the information benefits that
are available from the network. Even though the
integrated firms, in particular Japanese integrated
mills, were well positioned on both types of net-
work position, their alliances reflected their current
technological base. These alliances included joint
ventures in coal and iron ore mines, joint devel-
opment programs with machinery companies, and
technical assistance agreements that were geared
to enhance their blast furnace and continuous cast-
ing technological base. In the wake of a radical
change in technology, the ability of these firms to
compete in the new environment was severely con-
strained. The new CSC technology introduced by
Nucor was based on the use of iron carbides and
steel scraps as raw materials and utilized electric
arc furnace technology. Well-connected firms were
therefore unlikely to exhibit higher relative per-
formance following such a competence-destroying
event.
Thus, the results suggest that the type of change
matters. Changes that reinforce the importance
of information, knowledge, and technology that
already exist in the network, such as our leg-
islative change, strongly support our hypothe-
ses. Changes of a more radical nature, such as
our technology change, provide only mixed sup-
port for our hypotheses suggesting that networks
benefits may be limited in situations where all
the information necessary to compete may not
reside in the network. Evidence for the inher-
ent limitations to the novelty of information that
can potentially be available in the network can
be garnered from Afuahs (2000) study in the
microprocessor industry. He found that successful
microprocessor firms operating within the Com-
plex Instruction Set Computer (CISC) technologi-
cal base and well-embedded in the CISC network
were less successful in their transition to the new
Reduced Instruction Set Computer (RISC) tech-
nology. More significantly, the successful firms in
Copyright 2008 John Wiley & Sons, Ltd.
Designing Alliance Networks 659
the RISC standard were those that had no/little
connections with the previous CISC network base.
This is similar to the position of Nucor in the steel
industry network, which had just one joint venture
with another minimillYamato Kogyoprior to
the introduction of CSP technology. However, that
is not to suggest that all firms that are not well
connected in the current network would succeed
following a competence-destroying event. In other
words, while being entrenched in the current net-
work has adverse implications for firm perfor-
mance, the mere fact of being a peripheral player
does not guarantee success in the changed envi-
ronment.
More importantly, radical changes also indicate
the potential for radical restructuring of the net-
work as new firms enter, existing firms exit, and
the basis of competitive advantage shifts. In the
steel industry, the high levels of chronic overca-
pacity have led to significant downward pressures
on prices all through the nineties. As a result
of this and other industry dynamics, there was
a considerable level of bankruptcy, mergers, and
acquisitions during this period. Significant indus-
try restructuring of this type will certainly modify
the industry alliance structure as well as individual
firm alliance networks. While this type of restruc-
turing presents challenges to network analytical
techniques, research examining the evolution of
networks would provide valuable theoretical and
managerial insights.
The theoretical development of the two types
of network positions raises the possibility that
there could be contradictory forces operating on
the firms ability to dynamically design its net-
works to meet particular contexts. On the one
hand, entrepreneurial positions focus on the ability
of the firm to strategically form and dissolve ties
as it maneuvers within the network. On the other
hand, network prominence suggests the need to
develop, manage, and extend the relationships over
considerable periods of time in order to achieve
the benefits arising out of the accumulated invest-
ments in the relationship-building process. This
implies that the longer the firms relationships sur-
vive, the more likely it is that the firm could get
locked into its current network of relationships.
Alternatively, the more the firm focuses on devel-
oping its entrepreneurial position, the less likely it
is to invest in its existing relationships resulting in
little coordinated action. Our results indicate that
firms need to manage these trade-offs over time if
Strat. Mgmt. J., 29: 639661 (2008)
DOI: 10.1002/smj
660 B. R. Koka and J. E. Prescott
they are to design alliance networks that fit their
particular contexts. How firms manage these con-
tradictory influences has serious implications for
the quality and quantum of benefits available and
warrants research attention.
Finally, the results indicate further avenues for
research. While the context of this study has been
the steel industry, the basic findings of the con-
tingent effect of the alliance network would seem
to be generalizable to other industries and con-
texts. While the contingencies examined may dif-
fer, understanding their nature and impact may
explain firm performance vis-`a-vis their alliance
relationships in those industries. Other implica-
tions include the construction of scores for each
of the two types of network positions for every
firm in the network in order to examine the differ-
ent alliance strategies pursued by firms, as well as
the development of a taxonomy of alliance strate-
gies. The potential for examining a wide range of
questions, such as the evolution of such strate-
gies over time through simulation techniques, is
intriguing. While these and other ideas are beyond
the scope of this study, it does clearly illustrate
the far-reaching potential of our approach. Explor-
ing these and other questions clearly holds exciting
possibilities for managers and researchers.
AKNOWLEDGEMENTS
We gratefully acknowledge the comments and
feedback from Bob Atkin, John Camillus, Bill
Glick, David Krackhardt, Ravi Madhavan, and Sue
McEvily. This study was partially supported by
the Deans Award for Excellence Summer Grant
Program funded by the Deans Council of 100,
the Economic Club of Phoenix, the Alumni of the
W.P. Carey School of Business, and the Depart-
ment of Management Summer Grants Program at
the Arizona State University.
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