Interfirm Rivalry and Managerial Complexity

Interrm Rivalry and Managerial Complexity: A Conceptual Framework of Alliance Failure
Seung Ho Park Gerardo R. Ungson

Department of Organization Management, Rutgers University, New Brunswick, New Jersey 08840 Department of Management, Graduate School of Management, University of Oregon, Eugene, Oregon 97403 park@business.rutgers.edu bungson@oregon.uoregon.edu
Abstract
Empirical research indicates that more than half of strategic alliances fail, and the outcomes of alliance failure can be devastating. Despite the increased concern about managing strategic alliances, the eld still lacks a theoretical framework to describe the conditions and dynamics leading to the failure of strategic alliances. This paper attempts to distill, derive, and integrate theories across different disciplines into a unied framework that offers a better understanding of alliance failure. The conceptual framework focuses on two primary sources of alliance failure: interrm rivalry and managerial complexity. We propose that strategic alliances fail because of the opportunistic hazards as each partner tries to maximize its own individual interests instead of collaborative interests. Also, strategic alliances fail because of the difculties in coordinating two independent rms (i.e., coordination costs), and in aligning operations at the alliance level with parent rms long-term goals (i.e., agency costs). The paper extends the theoretical framework by looking into a process model of alliance development and failure.
(Alliance Failure; Interrm Rivalry; Managerial Complexity)
When two parties in an alliance cooperate at an early stage, they realize that they might compete with each other at some later stage. Nevertheless, they are willing to invest time and effort in anticipation of specic outcomes that would benet them, even if the period of collaboration is temporary. However, both parties know that the current intention by itself is insufcient, for, once completed, they could act opportunistically by withholding important information, providing false information, or simply cheating the other. Moreover, the sheer complexity of the alliance might preclude the partners from evaluating their contributions over time, leading to perceptions that their contributions are unbalanced and asymmetric. As one partner learns faster about the other,
dependencies escalate, creating even more asymmetry. If the partners trust each other (condence on the goodwill of the other), and if signicant resources and commitment are expended on the alliance, these problems would be minimized. But trust and commitment are tempered by perceptions of gains and losses, equity considerations, goal conicts, and role ambiguities between partners. Even in a highly complementary alliance, it is a daunting task to manage conicts arising from managerial and organizational dissimilarities between the partners. Within the context of our opening vignette, several conditions affect stabilizing and destabilizing characteristics of alliances: need for specialization based on partner complementarity, problems of opportunism, complexity in monitoring behaviors, difculty in coordinating partners, conict in strategic directions, and manner in which trust can attenuate rivalry. These characteristics are embedded in the exchange of skills and capabilities, intentionally or unintentionally, between partners, which affect the process and outcome of the cooperative relationship. Hence, the basic concept of an alliance, particularly a partnership between competitors, juxtaposes two countervailing tendencies: cooperative activities leading to the attainment of goals that advance the interests of both partners and competitive behaviors by one or both partners in pursuing their self-interests (Kogut 1988, Hamel 1991, Parkhe 1993a, Gulati 1999). Cast in this context, a strategic alliance represents a temporal structure of exchange relationships that generate cooperative or competitive behaviors between partners, depending on their private incentives. In recent years, alliances between erstwhile competitors have increased signicantly (Gulati et al. 1994, Park and Russo 1996). Competitors are motivated to form strategic alliances with one another not only to improve their market positioning, but also with the expectation of reducing rivalry or attenuating contractual hazards. Even so, competitive factors that motivate the alliance can be
1047-7039/01/1201/0037/$05.00 1526-5455 electronic ISSN
ORGANIZATION SCIENCE, 2001 INFORMS Vol. 12, No. 1, JanuaryFebruary 2001, pp. 3753
SEUNG HO PARK AND GERARDO R. UNGSON Interrm Rivalry and Managerial Complexity
only imperfectly redressed and can cause future problems and instability. In a broad sense, failure occurs when excessive rivalry eclipses cooperative tendencies. Despite the popularity of strategic alliances and the purported benets for participating rms, failures abound, with the failure rate reported at or higher than 50% (Porter 1987, Harrigan 1988, Parkhe, 1993a). From a study of large U.S. corporations during the 19501986 period, Porter (1987) reported the failure rate of alliances was higher than 50%, which was much higher than the failure rate of internal venturing or corporate buyouts. Alliance failure often causes several other adverse effects to participants. Studies indicate that in cross-border alliances, U.S. rms incurred more serious losses than their counterparts because of an involuntary loss of potential revenues and uncompensated transfers of rent-generating resources, such as technology (Hamel et al. 1989). Other adverse effects include operational difculties and problems, disagreements, and anxieties over the loss of proprietary information. Alliance failure is also associated with more intangible, adverse outcomes such as the loss of reputation. Despite overwhelming empirical evidence that alliances are unstable, there are still very few studies, if any, that provide comprehensive discourses on why alliances fail (Parkhe 1993a). On the surface, there is no dearth of explanations as to why strategic alliances fail: poor management, poor communications, lack of trust, competitive rivalry, lack of top management commitment, cultural differences, etc. While these reasons appear to be intuitively clear, they also tend to be anecdotal in origin, ad hoc in content, and fragmented in their development. Parkhe (1993b) criticized researchers for having noncumulatively focused on different dimensions of the strategic alliance, whose results have not been coalesced into a collectively coherent body of work. Smith et al. (1995) implore future researchers to be more systematic in their examination of the theoretical variables that promote cooperation (and competition). The lack of a comprehensive framework has led to empirical fragmentation and has encouraged static representations of alliance failure. Without a general theory of alliance failure for which boundary conditions can be dened and tested, future empirical tests may remain fragmented, impeding further theoretical development. The objective of this paper is to develop a theoretical framework of alliance failure. In developing this framework, two tracks were pursued. One strategy was to nd systemic relationships among the different variables that account for failure in a strategic alliance. Of particular importance, however, was distinguishing between failure in a strategic alliance and that in any generic partnership
within an organization. The relevant context is: What is distinctive within a strategic alliance, as opposed to a generic partnership within an organization, that leads to particular patterns of failure? Our focus in this study is also limited to the failure of a strategic alliance as an alternative form of governance structure for interrm transactions, not the failure of the alliance from each partners point of view. Within a broadened transactional cost framework, we postulate that alliance failure results from competitive rivalry and managerial complexity that act as destabilizing characteristics within an alliance. We also introduce some discussion of specic conditions that affect these two dimensions along the processes of managing alliances. This is undertaken by postulating ex ante, in situ, and ex post variables and conditions underlying the stage-of-growth in alliances. Using this track, countervailing tendencies are explored. The paper concludes with suggestions for future studies of alliance failure.
A Conceptual Framework of Alliance Failure

In our view, two continuing developments have impeded the introduction of a systematic and comprehensive framework of alliance failure: the contestability of different interpretations (measures) of alliance failure, and the lack of cross-fertilization between numerous theoretical schemes. While helpful in addressing specic issues on alliance management at the midrange level of analysis, they have also retarded integration and subsequent advancement at a broader level of analysis. Contestable Measures A unique nature of the alliance is the involvement of two independent rms in one frontier, which makes it elusive to assess performance of an alliance (Anderson 1990). Studies have utilized different measures, including both objective (e.g., survival, termination, duration, nancial gains, etc.) and subjective or process-oriented measures (e.g., goal attainment, satisfaction, learning, competence building, etc.) to assess alliance outcomes (see Table 1 for summary). These measures may reect the performance of strategic alliances, but in different theoretical questions. They also focus on alliance activities at different levels, i.e., either the parent rm or the alliance levels, with different understanding of alliance goals. At the parent level, partners are often contradictory in their assessment of an alliance given the asymmetry in their goals and interests in relation to the alliance. It is possible that one partners success means complete failure to the other partner. Local management at the alliance level also differs from their parent rms in terms of the direction of
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the alliance. While parent rms try to t alliance operations with their long-term strategic goals, alliance managers are more concerned with local interests as they try to adapt to market changes. Another problem in the literature has been the difculty in cross-validating ndings from various studies because of their use of different concepts and measures of alliance outcomes (Parkhe 1993b). Despite the proliferation of measures, there is an emerging preference for dissolution as the appropriate measure of alliance instability, if not failure. A fundamental premise is that a strategic alliance is not expected to last indenitely and, therefore, the instability of any alliance may be measured in terms of its expected duration. It is generally believed that a strategic alliance perceived as performing successfully by the partners is more likely to remain in operation than those viewed as less successful (Porter 1987). Hence, instability may be signaled by unexpected termination, i.e., dissolution of the collaborative relationship. Even though disagreement exists regarding whether
dissolution implies failure of a strategic alliance, there has been substantial theoretical and empirical support for dissolution as a sign of downside in interrm collaboration. Kogut (1988) argued that dissolution typically reects a business failure or irresolvable conict among the partners. Porter (1987) contended that dissolution is signicant because companies generally do not divest or shut down a successful alliance; dissolution happens only when the alliance is not nancially viable. Not surprisingly, he found dissolution to reect poor nancial performance in one, if not both, parties. In addition to economic considerations, dissolving an ongoing cooperative structure is signicant considering powerful socialpsychological motivations to preserve the cooperative relationships that entail transaction-specic investments. Investments in interrm cooperation include not only economic and technological resources, but also social commitments and entanglements of individual agents. It is not only in the economic but also in the psychological best interests of the organizational parties to nd ways to
Table 1
Summary of Performance Measures in Alliance Studies Authors Sample Size (Failure Rate) Operational Denition
Performance Measures Alliance Level Survival (Stability)
Franko (71) Tomlinson (70) Holton (81) Killing (83) Kogut (88) Beamish (87) Porter (87) Harrigan (88) Park & Russo (96) Harrigan (88) Kogut (88) Park & Ungson (97) Tomlinson (70) Good (72) Rafi (78) Holton (81) Killing (83) Beamish (87) Harrigan (88) Parkhe (93a)
1100 (24.1%) 107 (50%) Conceptual 36 (30%) 149 (46.3%) 66 (45%) 300 (50.3%) 895 (54.8%) 204 (67.5%)
Liquidation/Ownership Change Termination Complete Withdrawal Liquidation/Reorganization Termination Divestiture Dissolution/Acquisition Alliance Age
Duration
Financial Performance
ROI Growth/Capital Expenditure Alliance Returns Conceptual 36 (36%) 66 (61%) 895 (54.7%) Chronic Dissatisfaction PoorGood Mutual Agreement Mutual Agreement
Subjective Index
Composite Index Partner Level Achievement of Individual Goals and Learning
Hamel et al. (89) Koot (88) Hamel (91)
Conceptual Case studies
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preserve their socially embedded relationship as they face adverse situations (Ring and Van de Ven 1994). In international alliances, studies often dene successful collaboration as a stable business relationship that meets the needs of both partners over the long term while dissolution creates long-term political tensions (Franko 1971). Studies also show that dissolution is highly correlated with parent rms reported dissatisfaction with the venture and perceptions of how the ventures performed relative to their initial objectives (e.g., Geringer and Herbert 1989). Given this confusion regarding the concept of alliance failure, the theoretical framework of alliance failure developed below is limited to the alliance level. In particular, our model focuses on the assessment of strategic alliances as a governance mechanism that is formed to pursue collaborative interests between two or more independent rms. Accordingly, our model does not fully address issues on alliance failure at other levels, such as parent rms, or theoretical constructs than the failure of alliances as an alternative governance mechanism for interrm transactions. Because our focus lies on the failure of a strategic alliance, not necessarily the failure of partners, dissolution may best reect the concept of alliance failure as featured in our conceptual model of alliance failure. Lack of Cross-Disciplinary Integration Another problem in studying alliance failure is the proliferation of theories on the subject, with little crossfertilization. The study of cooperation and competition tends to be multifaceted and multidisciplinary, including disciplines from economics, political science, sociology, organization science, business strategy, etc. While the assumptions and approaches vary, these studies suggest that interrm cooperation and competition are embedded in social conditions or contexts that structure the rules of conduct to govern cooperative and competitive behaviors. These conditions inuence how such behaviors are dened, chosen, and implemented. Not surprisingly, scholars have used a wide range of disciplines to explain the failure of strategic alliances: for example, transaction-cost economics (Buckley and Casson 1988, Parkhe 1993a), strategic behavior theory (Kogut 1988), game theory (Parkhe 1993a, Gulati et al. 1994), agency theory (Geringer and Hebert 1989), resource-based view (Eisenhard and Schoonhoven 1996), learning theory (Hamel 1991), and investment option theory (Kogut 1991) have been used to relate alliance failure to opportunistic hazards of competitive collaboration. Also, along with transaction-cost theory and agency theory (Geringer and Hebert 1989), various organization theories, such as resource dependence (Cummings 1984),
workow interdependence theory (Cummings 1984), congruence model (Barkema et al. 1996), informationprocessing model (Mohr and Spekman 1994), evolutionary model (Koza and Lewin 1998), and strategy-structure t model (Holton 1981) have focused on managerial and organizational problems, such as coordination costs and agency costs, to explain alliance failure. Table 2 summarizes these theoretical perspectives, which vary in substance and underlying contexts, and key metaphors and generating forces that have been used to explain the failure of strategic alliances. Although these theories were unique in their contribution to explaining alliance failure, they mostly adopted contingency approaches, with each theory addressing a small part of the relationships leading to alliance failure. So far, there has been little effort to integrate these multiple views and to look for the underlying theoretical constructs that could tie these eclectic explanations together. This explains why the eld still remains so fragmented and is lacking a systematic framework to explain alliance failure. As the summary in Table 2 indicates, however, these multiple perspectives can be complementary; it appears that they converge into two primary dimensions of alliance failure: rivalry (or appropriation hazards) and managerial complexity. Below we develop a conceptual framework of alliance failure by focusing on these two dimensions, which cover most key issues as discussed in previous studies. Accordingly, multiple perspectives introduced in earlier studies lay the theoretical foundation in our attempt to develop a comprehensive theoretical framework of alliance failure, which highlights two of the dimensions most commonly addressed by these perspectives. Although not complete in integrating these multiple perspectives, we hope our effort lays the foundation for future research to develop a general theory of alliance failure. Toward a Synthesis Earlier we posited a strategic alliance as a temporal structure of exchange relationship that generates cooperative or competitive behaviors between partners, depending on their private incentives. Our discussion of different theoretical approaches in the preceding section suggests that alliance failure can arise from rivalry between partners, and managerial complexity. The contractual stipulation of strategic alliances, that is a hybrid of market and hierarchy, explains this dual nature of alliance failure. Principles of market and hierarchy are still operative in an alliance although the alliance is a governance mechanism meant to remedy failures of these governance structures. Strategic alliances purportedly protect against the hazards of market and hierarchy through partners investment of
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Table 2
Theoretical Perspectives on Alliance Failure Theoretical Perspectives Transaction cost theory (Kogut 1988, Parkhe 1993a, Buckley and Casson 1988, Dellipi and Reed 1991, Park and Russo 1996) Strategic behavior theory (Kogut 1988) Game theory (Parkhe 1993a, Gulati et al. 1994) Resource dependency theory (Cummings 1984) Transactional value approach (Zajac and Olsen 1993) Resource-based view (Eisenhardt and Schoonhoven 1996) Investment option theory (Kogut 1991) Learning theory (Kogut 1988, Hamel 1991) Workow interdependence view (Cummings 1984, Park and Russo 1996) Metaphors Mutual forbearance Opportunism Trust Behavioral transparency Reciprocity Reputation General Forces Incentives among the partners Nature of competitive rivalry Goal divergence Operational overlap Asymmetric dependence & learning
Interrm Rivalry
Managerial Complexity & Uncertainty
Information-processing model (Mohr and Spekman 1994) Organizational control (Yan and Gray 1994, Killing 1983, Geringer and Hebert 1989, Holton 1981) Organization (Cultural) congruence (Park and Ungson 1997, Barkema et al. 1996, Brown et al. 1988) Role conict and formalization (Shenkar and Zeira 1992, Ring and Van de Ven 1994) Agency theory (Geringer and Hebert 1989) Transaction cost theory (Park and Ungson 1997, Geringer and Hebert 1989)
Conict Dissimilarity Ambiguity Control
Uncertainty and equivocality Cultural dissimilarity Organizational mist Excessive formalization Adaptive capacity Interpersonal dynamics
time and resources, which in return drive strong incentives for them to honor contractual terms of the alliance. Unlike this purported belief, however, studies have indicated that there still remain competitive threats to the partners, such as an involuntary loss of potential revenues and uncompensated transfers of rent-generating resources, e.g., technology (Hamel 1991). Even with minimal opportunism, partners also face difculties in coordinating their activities toward collective operations and in linking local operations at the alliance level with the partners long-term strategic goals. Figure 1 presents a model that explains alliance failure according to these two sources of problems: opportunistic hazards due to rivalry between partners, and coordination and agency costs resulting from complexity and uncertainty in managing a cooperative relationship. Previous studies related alliance failure mostly to competitive issues between partners (Kogut 1988, Parkhe 1993a). However, we believe managerial problems are equallyif not moreimportant in explaining the failure
Figure 1
An Integrative Model of Alliance Failure
of strategic alliances, especially in the case of crossborder alliances. From an in-depth case study, Larson (1992) concluded that economic transactions cannot be separated from the social context in which they take place. An idealized economic exchange is neither oversocialized, whose primary governance mechanism is values and norms, nor undersocialized, where partners remain as isolated and rational economic units (Larson 1992). In a cooperative relationship, partners face two
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prime uncertainties: uncertainties about the people and organization, and about their capabilities. The former type of uncertainty refers to a social-relations condition, the latter to an economic condition, affecting personal and economic trusts, respectively. Our model in Figure 1 addresses both economic and transaction-related issues and social-psychological, organizational, and managerial issues of alliance failure through the two dimensions of competitive rivalry and managerial complexity, respectively. The model also indicates that trust and commitment work as countervailing tendencies in these relationships by narrowing the disparity in the partners competitive incentives and managerial practices. Interrm Rivalry. In 1984, GE and Rolls Royce formed a strategic alliance to manufacture jet engines for commercial airliners. The GE-Rolls alliance seemed to be an ideal way of getting the two partners into markets where they had been weak, while enabling them to avoid some of the development costs required to design a new engine from scratch. However, this ideal t was scrapped in two years because the two companies cooperation in making jet engines turned into competition. Both sides realized that cooperation would not be possible given the direct competition and the lack of trust between them (Wall Street Journal 1986). The GE-Rolls alliance illustrates that even when strategic alliances between competitors are formed to improve their competitive positioning, this is not necessarily congruent to their individual goals. The same competitive motives to form an alliance accounts for the eventual demise of the alliance (Kogut 1988). Bleeke and Ernst (1993) reported that the success rate for alliances between competitors with similar core businesses, geographic markets, and functional skills is only about one in three. They concluded that managers typically choose direct competitors as partners in pursuit of short-term synergy through consolidation of overlapping product and market positions. However, such competitive alliances tend to fail because individual partner goals become misaligned with these collective goals, as illustrated by the GE-Rolls alliance. For so long as interrm transactions are made within a strategic alliance, competition will motivate partners to pursue individual interests at the expense of the other partner (Parkhe 1993b). Kogut (1988) noted that even equity-based alliances, short of full ownership, cannot fully resolve the potential for competitive conict. Empirical evidence also supports that strategic alliances between direct competitors are most likely to fail (Park and Russo 1996). Park and Russo concluded that the failure of strategic alliances is primarily attributable to causes associated with exchange between distinct parties, and
that once an exchange is moved away from a hierarchical operation, a major transactional threshold has been breached. The presence of competition within a cooperative arrangement causes a high level of transaction costs as partners adopt various contractual stipulations to avoid opportunistic hazards. According to a transaction cost perspective, these stipulations and costs involve those in acquiring and processing information, monitoring and administering contractual promises, and enforcing contractual promises. The potential transaction costs also involve legal and organizational costs in coordinating activity and enforcing conventional behaviors. Formal contracts between parties typically codify only a minimal set of obligations while a broader set of obligations is determined informally (Buckley and Casson 1988). It is, however, essential that parties meet both formal and informal obligations to sustain a cooperative relationship. Because of the need for both formal and informal safeguards, Williamson (1991) described strategic alliances as inherently temporal, unstable, and disfavored, particularly in that changes in an alliance cannot be made unilaterally (as with market consent), or by at (as with hierarchy). The success of an alliance depends on mutual consent from partners, but this takes time, particularly when external conditions change over time. As long as an alliance remains as an alternative mode of competition, defection from the spirit of collaboration is inevitable, especially when the lawful gains from insisting upon literal enforcement exceed the discounted value of continuing the cooperative relationship. Collective benets from an alliance are typically future-oriented and uncertain, while opportunity costs from cheating are more immediate and often tangible, which further aggravates opportunistic tendencies in an alliance. A partners opportunistic behavior brings immediate realization of individual goals without facing the uncertainty of long-term returns. Interrm rivalry in an alliance also makes mutual forbearance less appealing to the partners as they lack a long-term view. Buckley and Casson (1988, pp. 3435) concurred that a short-term view is likely to prevail when the agent expects the venture to fail because of cheating by others. The risk of prejudicing the venture through its own cheating is correspondingly low, and there may be considerable advantages in being the rst to cheat because the richest pickings are available at this stage. The prisoners dilemma also provides an insight about how competitive rivalry emerges within an alliance (Parkhe 1993a). The prisoners dilemma problem depicts conditions under which, at each iteration, there is an incentive to deviate from an institutional rule. In a competitive alliance, application of the game theory suggests
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that although each partner does better when all act cooperatively than when all act noncooperatively, any one partner can do better by acting noncooperatively when all other partners act cooperatively. Partners face constant temptations to renege on an agreement because a partner that does not renege, while its partner does, will do worse than when all partners renege. Therefore, partners sacrice collective goals in pursuit of private self-interests, which, in turn, can result in poorer performance for both parties and failure of the alliance. Both parties in an alliance can gain considerably by divulging meaningful proprietary information. However, one party stands to lose a lot if it provides this information while the other party does not reciprocate it. In fact, the party gains the advantage by holding out. Both parties stand to lose or gain, depending on their propensity to compete or cooperate. As customarily thought, in the absence of binding contracts, adverse consequences will result in the event that both parties do not cooperate. The game theory model implies that strategic alliances fail not because of poor decision making by managers, but because of the nature of incentive structure in a prisoners dilemma (Parkhe 1983a). This is true unless the pattern of payoff is adjusted to encourage mutual coordination of trust through continuing interaction between the partners (Zajac and Olsen 1993). Gulati et al. (1994) suggested that partners can avoid the prisoners dilemma by restructuring the nature of cooperative decision making. Because partners expect better payoffs from the alliance than they would without the alliance, they may restructure the decision making into a sequential process instead of a simultaneous one, which creates the prisoners dilemma. Partners may initiate unilateral commitment by committing to one of the choices already available to them, creating a situation similar to mutual hostage and credible commitment. Still another perspective for understanding rivalry comes from the resource-based view of the rm. Within this perspective, rms are heterogeneous with respect to their resources/capabilities endowments. Resource endowments are sticky over any strategically relevant time frame, and absent some linkageslike alliancesrms are stuck with what they have because of imperfect mobility and complex development process of resources/ capabilities. It is easier to acquire existing resources/ capabilities from alliance partners than to develop them internally, which has been the main cause for proliferation of technological alliances in recent years (Eisenhardt and Schoonhoven 1996). It is likely in an alliance that the resource-advantaged partners will appropriate the economic rents of their less-advantaged partners. Hamel (1991) reported that several partners in his study regarded
alliances as transitional devices where the primary goal was to internalize partner skills. Reich and Mankin (1986) criticized that unintended unilateral transfer of technology competencies from U.S. rms to their Japanese partners has caused the erosion of U.S. rms resource bases and competitive advantages. Resource appropriation is more probable in the direction of partners with more ambiguous, immobile resources appropriating the less ambiguous resources of their partners. The partners with transparent resources and capabilities are more vulnerable to resource appropriation by the other partner. The appropriation hazard is further heightened as the partners differ in their capabilities to learn and internalize external capabilities (Hamel 1991). Resource appropriation is also affected by the pattern of interdependence between the partners (Park and Russo 1996). Integrative alliances, in which the partners contributions represent a pooling of their talents (e.g., when partners jointly manufacture a new good), require more frequent and intensive information ow. As the interaction continues, it is possible that one of the partners could have opportunities to gradually expose and appropriate the others key rm-specic assets. Studies indicate that integrative alliances face a stronger threat of appropriation hazards where partners may lose important knowhow and its competitive basis, than sequential alliances where each partners contribution lies on a sequential path with clear boundaries between partners. In summary, various studies have attributed the failure of strategic alliances to interrm rivalry by applying multiple theoretical perspectives, such as transaction-cost theory, game theory, resource-based view, learning theory, and resource dependence theory. This line of studies focuses on rivalry between partners, whose primary emphasis is on pursuing self-interests over long-term collective goals. Opportunistic hazards are inevitable in strategic alliances because of this competitive rivalry between partners. There exists a threat of each partner pursuing short-term and tangible gains by appropriating its partner and reneging on the contracts. In a competitive alliance, it is difcult to develop trust between partners, and once each party begins to doubt the other there is often no end to it. Subsequently, strategic alliances become a costly governance structure to arrange interrm transactions as partners try to employ safeguards against these potential hazards. These appropriation hazards eventually lead to the failure of the alliance. Interrm rivalry is an issue that resides in the nature of cooperation and partners role and disposition toward an alliance. This dimension of alliance failure is thus closely tied with partners incentive and motivation in a cooperative relationship. Underlying rivalry between partners
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presents a situation in which each partner weighs gains from the collective operation against individual interests as new opportunities emerge in the market. As long as this competitive uncertainty continues, it is difcult to develop trust between partners and the alliance loses its advantage as a transactional mechanism over market and hierarchy. Interrm rivalry, however, explains only part of the reasons for alliance failure, primarily related to economic, strategic, and transactional issues at the interorganizational level. Managerial complexity and uncertainty also poses another major problem in managing an alliance. Implementing an alliance is a difcult task because of differences in partners managerial and organizational practices. Managerial Complexity. The AT&T-Olivetti alliance in the early 1980s, which combined Olivettis competence in global marketing and AT&Ts technological superiority, was considered a perfect match, at least in economic terms. Despite such strong economic and strategic compatibility, however, this alliance was troubled from the beginning, primarily due to managerial and organizational incompatibility. Olivetti was an extremely aggressive, fast-moving, entrepreneurial organization while AT&T was regarded as the ultimate example of professional, technocratic management culture. As this case illustrates, strong economic and strategic complementarity and the absence of rivalry and asymmetry between partners do not necessarily lead to success. Strategic alliances also fail because they require excessive effort to coordinate and integrate two independent organizations which result in a high level of managerial complexity and uncertainty. Along with coordination costs as partners strive to work together, they also experience agency problems in aligning their interests with alliance managers who do not necessarily work for their parent rms interests. In a most basic sense, alliances are formed because the gains from specialization override the costs of coordination. Specialization by discrete parties creates the need for collaboration when further specialization proves costly. For example, if Partner A has specialized in a particular skill, such as research and development, and Partner B has a distinctive edge in manufacturing, forging an alliance between them to meet predetermined goals would be more efcient than if they had to learn each others specialties. Coordination problems within the alliance stem from the complexity of activities that arise from specialization. Even when the overriding goal is to cooperate, the lack of information that parties need to have to enable them to coordinate their specialized activities may impede cooperation. Without the exchange of proper information
over time, partnerships can erode into adverse, competitive situations. The complexity of activities that result from the difculty in accessing specialized or idiosyncratic knowledge creates difculties in communication and may prevent effective cooperation. Early writers, such as Simon (1947) and Barnard (1968), have argued that this uncertainty and complexity in information processing is why complete cooperation is not possible. In the context of alliances, greater coordination between more specialized partners is needed. The logic for collaboration is that each partner derives value from coordinating specialized activities that far exceed the costs of coordination. However, it is difcult to sustain this position over time. The dynamics of the exchange changes the balance of contributions, creating asymmetric dependence (Hamel et al. 1989). Unless this is corrected, coordination difculties will overwhelm cooperative activities, leading to the failure of the alliance. Successful alliances require nurturing the collaborative relationship and creating new value together, which goes far beyond simple exchange of competencies. Top managers, however, often devote more time to screening potential partners in nancial terms and controlling the relationship than to managing the partnership in human terms. People-related issues are often not addressed until an alliance is formed, which may be due to the belief that these can be worked out later, or perhaps to maintain secrecy in negotiating and planning such ventures (Cascio and Serapio 1991). Strategic alliances often involve managers from different parent companies with different national, cultural, social, political, and economic backgrounds. In the case of cross-border alliances, the social context in which they operate is partly dened by the cultural and institutional background of the nationalities the partners represent. National culture then affects managerial behavior and moderates the relationship between structural and economic variables and performance of the alliances. It has been proposed that the similarity of cultural values may reduce misunderstanding between the partners, and that culturally distant partners experience greater difculty in their interactions. Lane and Beamish (1990) argued that cultural compatibility between partners is the most important factor in the survival of a global alliance, because the defects in alliances often stem from the unobtrusive inuence of national culture on behavior and management systems, which may create unresolved conicts. Partners from different national cultures tend to experience a lack of t in organizational and strategic practices, making coordination more difcult (Park and Ungson 1997). Lack of t with a partners culture also leads to poor communication and mutual distrust.
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In addition to the difference in national culture, the failure of a strategic alliance is also caused by how compatible the partners are in regard to specic organizational characteristics (Doz 1988, Yan and Gray 1994, Park and Ungson 1997). Because an alliance is a hybrid of more than two independent rms, dissimilarities in organizational structures and processes can create problems in coordination. Brown et al. (1988) conjectured that organizational compatibility is a more signicant factor than national cultural differences in explaining the outcome of an alliance. As dissimilar partners may expend time and energy to establish standard managerial routines to facilitate communication, they may incur higher costs and mistrust relative to a strategic alliance with similar partners. Disagreements over operating strategies, policies, and methods often arise even when the alliances are quite self-contained and have a minimum of interaction with other units within the foreign-based multinational partners operations. Thus, differences of opinion about dividend payout policies, debt-equity ratios, marketing policies, quality control methods, and the like can become so great that one or more of the partners either wishes to withdraw from the alliance or at least is chronically unhappy with the operation of the enterprise. There is also a high degree of uncertainty and equivocality in managing an alliance. With the inherent system multiplicity, serving two bosses and two sets of expectations, alliance managers are prone to role conicts and ambiguities (Shenkar and Zeira 1992). Alliance managers often lack information about the specic expectations of different managers in each parent rm, the different expectations of different employee groups in the alliance, and the different expectations of host country organizations with which they must interact. Alliance management thus needs to exert costly informationsearch effort to reduce these uncertainties and promote a strategic t of allying rms with the alliance. Strategic alliances also face agency problems in integrating alliance activities with the parent rms. The employment relationship between the parent organization and alliance managers reects the basic agency structure of a principal and an agent who have different goals and attitudes toward risk (Holton 1981). Doz (1988, p. 335) described this conict in the following terms: Most of them (alliance managers) had little to lose, in career terms, either because they were already marginal in their own company or, on the contrary, because their position was so secure as to be unassailable. In both cases, this allowed them to accept unusual levels of personal risks and to deviate from corporate norms in making the partnership work.
Agency problems are exacerbated by strong interdependence between the alliance and the parent organization. This is because decisions at the alliance level have direct effects on the parents overall costs and revenues. Partly as a consequence, there should be tight and effective monitoring of the alliance in order for it to achieve its objectives (Franko 1971). Even so, it is difcult and costly to verify what alliance managers do. Alliances are typically undertaken in highly uncertain and risky settings, creating a high level of outcome uncertainty and aggravating the problems of monitoring managers activities, much less deciding their appropriate incentives. It has been reported that most alliance managers often disregarded the impact of alliance activities on parent rms operations (Holton 1981). The agency problem was obvious in the Yamatake-Honeywell alliance as Honeywell and the alliance both entered China and ended up in direct competition (Gomes-Casseres 1996). This conict between parent rms and the alliance is why control has been a variable of interest in prior research (Geringer and Hebert 1989). Even though empirical ndings are conicting, the emerging pattern directly relates management control to alliance performance (Yan and Gray 1994). Findings also suggest that problems in piloting a strategic alliance most likely occur when control is equally shared. In an unbalanced alliance, the nondominant partner has an a priori notice that their pursuit of individual interests may be difcult (Park and Russo 1996). Accordingly, they expect at least some ex post strategic choices to diverge from what they would have chosen. Dominant ownership can help avoid agency problems by simplifying the control process and maintaining easier integration with the parent rms strategic direction, although incentives to cheat are greater in a dominant alliance. Yan and Gray (1994) argued that when the control is even between partners, each partners performance, at least as assessed by its own perspective, is equal. Control helps the parent rm to achieve the full potential of their strategies and to attain their objectives by reducing agency costs. However, control may also lead to increased overhead costs because it implies more responsibility and resources for the partner (Geringer and Hebert 1989). Moreover, the exercise of extensive control (and formalization to manage the control process) over an alliances activities and decisions may incur a high level of bureaucratic costs and limit the efciency of the alliance. Excessive control by a foreign partner over a local alliance often hinders the autonomy and exibility of the alliance and its management, which weakens potential benets of the alliance. Therefore, it is critical to nd the strategy-structure t at which the margin between benets
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and costs from an alliance becomes optimal. This will minimize potential agency problems, achieve tight integration between the parent rm and the alliance, and allow enough freedom for alliance managers to exibly respond and adapt to the needs in local markets (Bleeke and Ernst 1993). The trouble in the Yamatake-Honeywell alliance illustrates the importance of maintaining balance in controlling an alliance. Honeywells hands-off approach explains the initial success of the alliance, but the eventual conict between Honeywell and the alliance is attributed to the weak control over the alliance. As strategic alliances fail because of economic and strategic incompatibility, alliances also fail because of difculties in implementing the collaborative efforts and integrating them with the parents strategic objectives. These managerial and organizational concerns in strategic alliances are rooted in various theoretical perspectives, such as cultural complementarity, information-processing model, organizational congruence, strategy-structure t, and agency theory. These theories focus on managerial complexity and uncertainty in coordinating the relationships between partners, and between partners and the alliance, that become the sources of coordination and agency costs and organizational rigidity of the alliance. Along with appropriation hazards, these managerial concerns incur a high level of transaction costs, especially bureaucratic costs and agency costs, in the process of coordination. Alliance partners often end up wasting valuable time and resources to understand each other, even before the actual collaboration starts. This is what happened in the proposed alliance between Ford and Fiat in 1995. After more than a year of discussing a wide range of proposals, they realized that they could not agree on the management structure necessary to launch the alliance. The differences in management and operational structures were so severe that they decided it was impractical to enter into a cooperative relationship. It is important to maintain exibility at the alliance level because it is inevitable that internal and external conditions of the partners and the alliance gradually change over time. Excessive exibility at the alliance level, however, often becomes a serious problem in working with parent rms, causing them to withdraw their commitment to the alliance, as illustrated by the trouble in the YamatakeHoneywell alliance.
Interaction Between Interrm Rivalry and Managerial Complexity

In the foregoing sections, we have illustrated the sources of alliance failure in terms of interrm rivalry and managerial complexity. While they are conceptually distinctive, these two components are inseparable in practice.
Strategic alliances fail when there is strong rivalry or a high level of managerial complexity, but failure often results from the interaction between these components. These two dimensions represent strategic and managerial issues that affect partners motivation and ability to continue the cooperative relationship. The most unstable type of alliance is one featured with a high level of rivalry and managerial complexity. There is little strategic and organizational complementarity in this type of alliance; participants put private interests over collective interests and have difculty in coordinating managerial and organizational differences between them. This type of alliance is likely to be between direct competitors, as indicated by strong rivalry. Accordingly, it is difcult to develop a trust-based relationship, and partners become hesitant to make a strong commitment to the collaborative operation. Such an alliance also becomes a highly inefcient governance structure to pursue interrm transactions. Coordination costs are high because it is difcult to resolve organizational dissimilarities and to manage cooperative processes. The Ford-Volkswagen alliance set up in the 1980s to expand their market basis in Latin America represents a typical case of this type of alliance. Although the partners had a common goal of establishing a critical mass in Latin Americas emerging markets, the alliance was an uncomfortable marriage from the beginning. Because the partners were direct competitors in most other markets, they were not willing to share their own design skills and marketing strategies with their partner. Differences in cultural values and organizational practices also made it difcult to develop a coherent strategy to challenge GM, who was a major competitor in the market. By extension, we propose that the alliances with weak rivalry and low managerial complexity are least likely to fail. Previous studies point out the importance of complementary needs for the viability and potential of an alliance (Porter and Fuller 1985). These types of alliances are based on highly complementary strategic interests between partners that can easily converge toward each other. There is thus little rivalry in the alliance and cooperative behaviors become more compelling. This would be an ideal setting for interrm collaboration without any serious transaction and coordination costs; the partners are easily able to understand and trust each other because of similar cultural and organizational backgrounds and strong economic complementarity (or weak rivalry). They also become easily committed to collective interests that can be carried out even at a low level of socialization between partners, which further contributes to improving transactional efciency. We can also expect similar economic mindsets and strong organizational
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transparency between the partners, which help them understand each other better. Unlike the previous two types of alliances, there is much ambiguity in predicting the outcome of the alliances with either strong rivalry or high managerial complexity. The likelihood of failure in these alliances depends on how the partners manage the problems caused by either their competitive intentions or organizational and managerial dissimilarities. Firms enter strategic alliances in pursuit of their self-interests through collaboration with other rms. The rst-order condition for successful alliances is the presence of complementary benets for both partners, which cannot be acquired efciently through individual operations. Once an alliance is formed based on partners economic interests, its success subsequently depends on the dynamic change of each partners economic interests and the effective implementation of alliance activities. We thus view the management of managerial and organizational dissimilarities as a second-order condition for managing successful alliances. Strategic alliances fail when either or both of these rst-order and second-order conditions are not met. An alliance is able to sustain its structure and remains as an efcient mechanism for interrm transactions as long as partners economic benets overshadow potential costs in managing the alliance. Alliance partners would be more eager to work out conicts from managerial and organizational differences as long as potential economic benets remain strong. Because they have strong economic incentives and are more willing to cooperate, it is also much easier to develop mutual trust. Once partners develop trust toward each other, the alliance becomes more sustainable as they can better coordinate their efforts to overcome managerial complexity and reduce coordination costs. The strong economic incentive also allows effective socialization and governance in managing the cooperative structure. Governance structures that are closer to a market mechanism, such as licensing and other types of nonequity relationships, would work better in an alliance with weak rivalry but high managerial complexity. Hierarchy-like governance structures (e.g., joint ventures), involve a high degree of interdependence and coordination between partners, and interrm coordination becomes a highly demanding and difcult task. On the other hand, marketlike governance structures require (relatively) a much lower level of interdependence and a simpler coordination process than hierarchy-like governance structures. It is thus possible that alliances can overcome problems resulting from organizational dissimilarities by adopting a proper governance mechanism, as long as there are sufcient economic gains. This does not necessarily imply
that alliances with high managerial complexity and low rivalry do not fail. Alliances often face a situation in which coordination difculties offset even strong economic gains. Firms would be better off adopting different transaction mechanisms for similar economic interests rather than entering into an inefcient alliance structure. The alliance among IBM, Toshiba, and Siemens illustrates a failure resulting from high coordination costs, despite strong economic interests for the partners. This alliance was set up to design and manufacture 256-megabit chips, which required a high level of interaction among the partners. However, the economic potential in this alliance was soon overshadowed by difculties in coordinating the three culturally very distinctive rms; IBM perceived Toshiba as excessively group-oriented and Siemens as overly concerned with costs and details of nancial planning. Direct rivalry between partners, however, poses a serious threat to alliance success in that it is difcult to build a trust-based relationship. This lack of trust impedes the exchange of rm-specic assets to accomplish collective goals. Especially when alliances involve technology transfer, there is reluctance to provide extensive information about the technology. Expecting to be cheated, each partner tends to disguise or limit its contribution. As a result, only low-quality or insufcient information will be transferred in competitive alliances, and eventually dishonest activities will drive honest activities out of the alliances, causing the failure of the alliance (Akerlof 1970). Presumably, alliance partners can prevent these problems by adopting a tightly specied governance structure, such as hierarchy-like governance structure (e.g., equity alliances). However, these alliances cannot avoid possible transaction hazards because each party focuses more on its self-interest, given the competitiveness between the partners. These are similar to the type of intermediate governance structures Williamson (1991) referred to as a highly unstable form of governance structure. Williamson argued that intermediate types of governance structures are not impervious to opportunistic threats, and they are nothing more than a temporary arrangement for interrm transactions. Even if the partners in a competitive alliance can design a mechanism to govern possible opportunistic hazards, this only compounds managerial complexity as tighter monitoring is needed. In the following section, we discuss the underlying conditions that affect interrm rivalry and managerial complexity in an alliance. In particular, it focuses on some of the process-related conditions that affect rivalry and managerial complexity differentially over time as the cooperation continues between partners.
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Toward a Process Theory of Alliance Erosion and Failure

What would make a cooperative alliance more competitive (and vice versa)? In our view, there are a number of conditions, ex ante, in situ, and ex post, that inuence cooperative and competitive behaviors within an alliance, and that explain how alliances might transform over time into different types discussed earlier. These conditions are illustrated in Figure 2. Ex Ante Conditions Ex ante conditions refer to prevailing conditions at the time of the formation of an alliance. For the most part, these conditions inuence the structure of the alliance and can predispose partners toward competitive or cooperative behavior. As developed in earlier sections, these conditions include the nature of competition (direct competitors are more likely to engage in future competitive behavior), complementarity (partners that are well matched in terms of their contributions are more likely to engage in cooperative behavior), and the perceptions of endgames (partners who recognize the downfalls of
cheating will be less likely to engage in opportunistic behavior). In addition to rivalry, ex ante conditions cover structuring agreements that arise from the need for coordination, particularly in the context of parent-rm relationships. We noted two conditions that inuence competitive and cooperative behavior: cultural incongruities (differences in corporate culture and internal politics create high coordination costs in an alliance) and agency issues (agency problems also occur because alliance managers have different attitudes on risk than those of the parent organization), under which coordination costs occur. In Situ Conditions What are the dynamics that characterize possible movements among the different types of alliances? In situ conditions relate to those that affect rivalry and managerial complexity within the course of an alliance. In a fundamental sense, these conditions are process related and strongly inuence development of the alliance. Each stage of cooperation provides a receptive context for the initiation and evolution of economic exchanges in the following stage. Cooperative dynamics in a stage builds a historical context that affects the nature of cooperation in subsequent stages. Each stage of alliance evolution also runs through a cyclical process of negotiation, commitment, and execution according to the partners evaluation of the efciency and effectiveness of the alliances (Ring and Van de Ven 1994). The extent to which strategic alliances are affected by competitive rivalry and managerial complexity changes over time as resource exchanges and social interaction continue between partners. At each stage, alliance partners begin to reassess the overall values of the alliance in comparison with other types of governance arrangements, e.g., market and hierarchy, because their strategic interests and cooperative roles change over time. Empirical evidence indicates that the failure rate of equity alliances is nonmonotonic, rising in early years, but then declining after reaching a peak three or four years into the operation (Park and Russo 1996). Strategic alliances are formed with expectations of success and complementary economic benets. The survival of strategic alliances hinges on their adaptive capabilities to such dynamic changes over time. In our view, four interrelated factors are salient at this stage: changes in the external environment, perceptions of balanced contributions, the pace of bilateral learning, and asymmetric dependencies. Changes in the External Environment. Volatile conditions also lead to vulnerabilities within an alliance, as these affect the partners competitive positions. This is consistent with others who have emphasized industry and
Figure 2
The Dynamics of Erosion and Failure of Strategic Alliances
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environmental factors as the major reasons why organizations fail (e.g., Hannan and Freeman 1977), or why specic alliances are prone to failure (e.g., Kogut 1988). However, there is mounting evidence that alliance failure is not so much due to external factors, such as changing economic conditions, slackened demand for the product, opposition of government agencies, or changes in technological structure, but to internal factors, such as behavioral and managerial problems (Parkhe 1993b). An explanation is that once rms invest dedicated assets in an alliance, changes in the external environment become a less signicant factor for alliance failure unless changes are adverse and revolutionary. One serious concern for students in economics would be the anticompetitive issue of interrm collaboration (Berg and Friedman 1980). Some alliances, particularly joint production ventures, can in fact be anticompetitive in terms of price xing and bid rigging. Such illegitimate ventures are merely shams to mask cartel behavior and would face legal constraints as a serious external threat to their long-term survival. The changes in the U.S. legislation have reduced the likelihood of antitrust liability in recent years. The National Cooperative Research Act of 1984 allows joint R&D to obtain partial or full immunity from triple damage suits threatening the maintenance of the ventures. The U.S. government also does not intend to condemn presumptively joint production ventures, including ventures among competitors, and will take full account of foreign competition and potential procompetitive efciencies. Unless a venture is a disguise by a cartel to exercise market power and raise prices to consumers, it is safe from legal challenges, and its survival depends mainly on the partners behavioral and managerial dispositions. Furthermore, if an alliance is anticompetitive, the venture fails even before its operation gets off the ground. In other words, in the process of negotiation, anticompetitive ventures are normally blocked by government agencies as illegal operations. In short, changes in the external environment can change the market positions of alliance partners, thereby triggering more competitive or cooperative activities aimed at restoring or improving prealliance market positions. The Perceptions of Balanced Contributions. The raison detat for alliances are complementary benets that accrue to participating partners. Alliances provide access to the other rms proprietary know-how, assets, human resource needs, market access needs, government and political needs, and knowledge needs. Porter and Fuller (1985) argued that an alliance is stable for as long as contributions by each partner are perceived to be balanced and equitable.
The investment of both time and resources provides incentives for parties to honor the terms of the contract. However, the balance of contributions is perceived to be equitable provided that there are sufcient monitors for partners to make these assessments. But even with the best intentions, the complexity of the alliance allows the parties to pursue disparate goals and creates the need for monitoring activities. However, because monitoring is also costly and difcult, partners may attempt to reduce their work effort. The dynamic changes in the compatibility of partners contributions also affect the partners bargaining positions during the course of collaboration. Dymsza (1988) illustrated that international alliances between U.S. MNCs and local partners reached a stalement and broke up once the local partners developed the capabilities to take charge of the alliance operation. Many foreign rms also start out in Japan through joint ventures, but they soon terminate these ventures once they feel condent enough to set up their own sales networks. Maintaining an alliance that does not offer signicant complementary benets to the partners generates unnecessary costs. The perceptions of equity in a cooperative relationship are a critical factor to stabilize the cooperative structure. Pace of Bilateral Learning. Perhaps the key process variable in managing an alliance is the difference in learning capability and strategic intent for learning between the partners. Strategic alliances provide an important learning mechanism for other rms rm-specic skills. However, the asymmetry in learning and the subsequent asymmetric dependence between partners lead to alliance failure. This asymmetry is often cited as a primary reason for alliance failure between U.S. and Japanese rms (Hamel et al. 1989). It is also possible that changes in a partners competitive motives and strategic positions cause the other partys contribution less signicant over time, if not obsolete. Based on in-depth case studies, Hamel (1991, p. 88) concluded that in a narrow sense managers saw collaboration as a race to learn, but in a broader sense they saw it as a race to remain attractive to their partners. Failed joint ventures, particularly in the case of Japanese and American rms, can be traced to the ability of one of the partners, e.g., Japanese partners, to learn more quickly the core skills of its partner, e.g., American partners. Learning is determined by the propensity or desire for one partner (rm) to learn the core skills of another and the degree to which partners are transparent, that is, easy to learn about (see Hamel et al., 1989). American rms have been known to be more transparent about their work and attitudes compared to their Japanese or Korean counterparts.
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Asymmetry. To the extent that asymmetries in contributions occur, dependencies between alliance partners develop. Over time, one partner may be more dependent on the other (Hamel et al. 1989). Partly as a response, the disadvantaged party may reveal more and more of its proprietary know-how to maintain its initial attractiveness. Vulnerabilities created by this situation lead to hostage situations: The more dependent partner may face a small number bargaining situation that is held up by the other party. This may in turn engender opportunistic behaviors from the advantaged party. Because the survival of the disadvantaged partner depends on overall alliance performance, it may become even more vulnerable to actions taken by the dominant partner. The disadvantaged partner may initiate renegotiation of contractual terms to maintain equal or more control over the alliance, or leave the alliance altogether. Strategic alliances are also vulnerable to shifts in internal politics, as well as to wavering support by parent organizations. For example, while Honeywell was going through corporate restructuring in 1986, the alliances with Machines Bull of France, NEC of Japan, and Ericsson Telephone of Sweden were all phased out. Doz (1988) argued that parochial subunit goals and corporate politics within top management could erode any teamwork, understanding, and tolerance of rivalry. Difculties within the top management team, in turn, can create wide cultural gaps and poor communications at the level of middle management, where the need for collaboration is more acute. Accordingly, middle managers and staff in an alliance are often divided into these rival camps. Ex Post Conditions Ex post conditions relate to outcomes arising from partners assessments of efciency, equity, and goal attainment. Because purposes, values, and expected consequences are grounds for human choices, it is expected that continuation of an alliance will depend on such assessments. At the end of each collaborative cycle, each partner engages in redenition of the alliance and initiates a new loop of negotiation, commitment, and execution of cooperation. In claiming and distributing the value created by the strategic alliance, partners may experience conict when they perceive divergence of interests. However, partners perceived level of the alliances and the partners value, relative to other types of governance structures like market or hierarchy and other potential partners, may change at this stage. When partners realize a gap in performance from their historical comparison of actual to expected value creation, they decide to terminate the cooperative relationships unless they emphasize joint value maximization supported by strong relational norms that might
have developed over time. If partners manage to build social norms for joint value maximization, partners pursue joint searches for satisfactory outcomes to conicting situations and unsatisfactory results of the alliances (Zajac and Olsen 1993). Each of the looping sequences of negotiation, commitment, and execution stages, or the sequence of learning-reevaluation-readjustment in cooperative relationships, is assessed in terms of efciency and equity. Sometimes what counts goes beyond the actual contributions made by each partner and the prots and other benets obtained by each one. Even more important is what the partners perceive over the whole life of the operation. Strategic alliances fail when one or both partners perceive unfair treatment or an unsatisfactory ratio between compensation and contribution from the alliances. It is imperative to maintain mutually benecial rewards for the survival of an alliance. Earlier we postulated that trust and commitment could mitigate competitive rivalry and managerial complexity. In this section, we discuss how trust emerges as a result of ex ante, in situ, and ex post conditions. As partners develop mutual understanding of each other over time, a stronger form of trust, i.e., process-based trust, starts to replace the initial characteristic-based trust (Zucker 1986), and the alliance then becomes more dependent on informal measures than it was in the earlier stages. Strategic alliances become institutionalized and take on more hierarchical characteristics (Parkhe 1993b), substantially lowering managerial complexity and coordination costs. There is a higher level of integration between partners, and social control appears as a primary governance mechanism. However, even though the alliance becomes less marketlike in its design and governance, it is still affected by competitive spirit (like market transactions) between partners. As the interaction between partners continues, the alliance improves its repository of knowledge assets, i.e., interpartner relationships and skills, and the attachment between partners. The initial role relationships and expectations become socially embedded through repeated interactions over time (Ring and Van de Ven 1994). These enhanced interrm ties, however, become offset as changes occur in resource t between partners over time. Seabright et al. (1992) maintain that resource t deteriorates over time when there is a reduction in partners ability to satisfy resource requirements because of the increases in a partners resource requirements, the decreases in its exchange partners provisions, or the increases in the opportunity set. Strategic alliances are subject to environmental as well as internal changes that are derivative changes of parent rms management structure or strategic interests. The payoffs from strategic
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alliances may change over time, altering incentive structures for partners. Studies show that even though no violations of trust were found, strategic alliances were demised to decline or dissolve due to changes in competitive conditions and strategic direction; in particular, heavy reliance on a partner and the exchange of proprietary information represented major risks (Larson 1992). While trust and commitment provide countervailing effects for alliance stability, they do not evolve overnight and seldom come easily; they can be built only over time. As one popular resolution to the prisoners dilemma game, authors suggested tit-for-tat and mutual forbearance as strategies to develop trust and commitment (Buckley and Casson 1988). These strategies match forbearance with forbearance but punish cheating. Therefore, one partners forbearance or credible commitment at a stage gives rise to a positive feedback over time, while the perception of injustice initiates a negative feedback, leading to eventual failure of the alliance. Doz (1996) suggests that partners in successful alliances were willing to make irreversible commitments rst, expecting other partners to reciprocate, but using the opportunity to build and test trust. Generally, trust emerges based on norms of equity, and it can be extended to an organization with a reputation for trustworthiness (Ring and Van de Ven 1994). Transaction parties become aware of the relevant partys reputation on trust through consulting their own experience and/or from the experience of others (Gulati 1999). Taken collectively, opportunism leads to an asymmetric bargaining position and the dissipation of rm-specic assets. When these costs become insurmountable, the alliance may not succeed. Over time, partner behaviors become path-dependent; there will be escalating commitment as the alliances meet the partners individual goals and outcomes are perceived to be fairly distributed, but there will be decelerating commitment as they begin to note any sign of mistrust or lack of commitment from the other parties. The best and least costly mode of governance for an alliance would be trust and mutual commitment. A Japanese executive involved in an alliance commented that a partnership works on the basis of trust and commitment or not at all (Business Week 1986). American managers normally refer to formal contracts to avoid conicts and uncertainties, while Japanese managers prefer mutual discussion and mediation to formal contracts. Japanese managers view formality and the use of third-party management to control an alliance as signs of mutual distrust. Mutual trust in an alliance reduces interaction and minimizes bureaucratic complexity. It also helps partners overcome conicting situations and unexpected difculties.
Conclusions
Strategic alliances have become an essential element in recent corporate strategy. A review of the alliance literature reveals an extensive list of reasons for entering an alliance. Strategic alliances help rms gain market power and access, institutional legitimacy, and new competencies, as well as to exploit rm-specic competencies or reduce environmental uncertainty (Eisenhardt and Schoonhoven 1996). Strategic alliances also have become a powerful force in shaping a rms global strategy. Despite these purported benets, strategic alliances entail serious competitive risks, and managerial difculties in implementing the cooperative relationships. The high failure rates documented in the literature indicate that strategic alliances are more likely to fail than to succeed. In fact, success in an alliance is now regarded as an exception rather than a rule. Although several studies attempted to explore the potential sources of alliance failure, the eld still remains without a comprehensive theoretical framework. Previous studies, whether empirical or theoretical, seemed to have adopted contingency approaches focusing on a series of interactive and structural variables to explain alliance failure. This paper presents a theoretical framework that integrates these multiple explanations of alliance failure by focusing on interrm rivalry and managerial complexity. We believe that these two dimensions could be the logical foundations to understand alliance failure that have been addressed so far in the literature. We also believe that the recent slowdown of studies on alliance failure, or alliance performance in general, is partially the result of a lack of theoretical framework that could offer a direction for further studies. In this regard, we contend that this paper serves as a rst step toward deepening our understanding of alliance failure and developing a general theory of alliance failure with well-dened and tested boundary conditions. To conclude, this study presents a conceptual model of alliance failure based on rivalry and managerial complexity in an alliance that affects partners strategic interests and motivation to cooperate (or compete), and their ability to implement the cooperative structure. We further illustrate that the operation of rivalry and managerial complexity in an alliance is a dynamic function of the interplay among ex ante, in situ, and ex post conditions. These stages of development occur as a repetitive sequence in assessing each partners contributions. Changes in external environment, perceptions of balanced contributions, the pace of bilateral learning, and asymmetric dependencies are key process variables that inuence whether alliances remain highly competitive and complex, more complex than competitive, more competitive than complex, or relatively noncompetitive and
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complex. These variables also lead to pathological tendencies; more learning about the other may help promote trust, but it creates greater dependency. Underlying these stages, therefore, are social-psychological processes of sensemaking and enactment by both parties (Ring and Van de Ven 1994). A critical issue future studies should keep in mind is to clarify the concept of failure in a strategic alliance. As illustrated earlier, the outcomes and their predictors in an alliance vary according to the operational denition of alliance failure. These multiple indicators of outcome measures that have been used in previous studies are not necessarily accommodating to each other. In fact, some of the predictors are contradictory, although they may explain some form of alliance failure. For example, predictors of one partys success often indicate failure of the alliance as a governance structure. For this reason, it would be a daunting task to integrate multiple indicators of alliance failure and test them simultaneously in a single study. Rather, it would be more desirable to focus on a clearly dened concept of alliance failure to develop a theoretically and methodologically coherent study; or, studies may focus on multiple measures as long as they refer to the same level of analysis, i.e., alliance vs. partner levels. Another critical issue in future research is to follow dynamic, process-oriented approaches to study alliance failure (Koza and Lewin 1998, Yan and Zeng 1999). Recently, Koza and Lewin advocated the importance of adopting a coevolutionary perspective to study strategic alliances. Strategic alliances, like other organizational forms, emerge as an adaptive mechanism to market uncertainty, and their developments over time reect the coevolution of distinctive rm capabilities and of industry and market activities. Studies have so far been limited to static explanations of contingency factors of alliance failure. Given the change of in situ conditions over time, partners and alliances go through similar coevolutionary cycles in terms of their motives and capabilities toward the cooperative relationships. Alliance failure is an outcome of this coevolutionary adjustment to changes in the market, the competitive dynamics between partners, and assessment of efciency of the alliance as an alternative governance structure. It is thus critical to adopt a dynamic perspective and historical observations of cooperative processes. Because earlier studies followed a static approach, they could explore only the beginning and the end of a cooperative alliance, but not the cooperative process in the mid-life of alliances (Yan and Zeng 1999). It would be interesting to study how partners opportunistic tendencies evolve over time, how they react to divergent economic interests to avoid potential appropriation hazards, and how they manage ongoing conicts due to man-
agerial and organizational dissimilarities. Another promising area for future studies is to dissect and make comparisons of determinants of alliance failure across various stages of alliance life cycle. Harrigan (1988) admonishes rms to understand the strategic impact of alliances, whether they join an alliance or not, because they will undoubtedly face competitors that cooperate with each other. By delineating the structure of alliances, as well as the dynamics that inuence their development, the proposed framework illuminates the factors that can improve management of strategic alliances. It is hoped that this may be used as one guide in redirecting future studies of alliances. We also would like to think that this might redress the imbalance created by the prevailing attention to alliance success, as opposed to alliance failure.
Acknowledgments
The authors are grateful to Arvind Parkhe, Michael Gordon, Mike Russo, Jay Barney, Michael Lawless, Claudia Schoonhoven, and three anonymous reviewers for their helpful comments on earlier versions of this paper.
References
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Interfirm Rivalry and Managerial Complexity

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Interrm Rivalry and Managerial Complexity: A Conceptual Framework of Alliance Failure

Seung Ho Park Gerardo R. Ungson

(Alliance Failure; Interrm Rivalry; Managerial Complexity)

1047-7039/01/1201/0037/$05.00 1526-5455 electronic ISSN

A Conceptual Framework of Alliance Failure

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

Performance Measures Alliance Level Survival (Stability)

Composite Index Partner Level Achievement of Individual Goals and Learning

Hamel et al. (89) Koot (88) Hamel (91)

Conceptual Case studies

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

Managerial Complexity & Uncertainty

Conict Dissimilarity Ambiguity Control

An Integrative Model of Alliance Failure

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

Interaction Between Interrm Rivalry and Managerial Complexity

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

Toward a Process Theory of Alliance Erosion and Failure

The Dynamics of Erosion and Failure of Strategic Alliances

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

ORGANIZATION SCIENCE /Vol. 12, No. 1, JanuaryFebruary 2001

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