Theory And Practice Of Strategic Alliances

Published Date: 02 Nov 2017

Alliances represent strategic responses to the powerful forces of deregulation, globalization, technological change, and time to market concerns. While these forces have made the business environment vastly more competitive, complex, and uncertain, Bateman & Snell (2004) urged that companies are turning to strategic alliances in order to manage their costs, uncertainty and risk and specifically to access a wide range of competencies, technologies, and markets. By creating formal partnerships, companies can quickly acquire product development capabilities and marketing expertise that would otherwise require years of effort and considerable expense (Sundelin, 2009). At the same time, organizations are realizing that alliances do not automatically succeed or create value. Cost management should be closely aligned with and made part of corporate growth strategies, the challenge is not just to lower costs but also to ‘out invest’ competitors on growth (TDS, 2003).

Accordingly, Segil (2004) posited that creating alliances is an easier task than managing it and measuring its success. She argued that,

"Although it is not that difficult to make a deal, it is difficult to develop performance measures for a deal that is not a full-blown acquisition."

Therefore, this research will investigate the nature of different costs and cost assumptions in managing business performance of strategic alliances. Global competitiveness today demands well thought-out utilization of an organization’s resources. Companies have to cope with multiple dimensions of change involving international best practice, regulation, technology, new competitors and business models, market pressures and constantly changing customer demands (Drotski, 2008). Intense competition of this global economy has made many organisations to come together and collaborate in different fields where they have competitive edge. Telecommunication companies have not been left behind in this area and like any other business, are exploring new ways of having strategic alliances with other businesses.

All components of a business model have related costs and the size. The behaviors of the costs provide an indication on the flexibility and scalability of the business model. From the financial prudence concept and practise, lowering cost with $1 has a greater impact on the bottom line than increasing the revenue with $1 as revenue almost always comes with an associated cost.

Having a low cost structure is a strong competitive advantage that market leaders in industry recognize when organisations with low cost business models enter their markets. Sundelin (2009) gives global examples that can be cited:

In the steel industry the mimimills took on traditional smelters,

In automobile manufacturing standardized Japanese cars won out over customized vehicles,

"No frills" airlines such as Southwest Airlines or Ryanair took down traditional airlines such as US Airways and Swissair,

Open source software has taken large market shares within several software areas.

The traditional newspaper companies compared with the low cost online substitutes.

The business model concept is a good framework to identify where costs arise, and how it relates to the creation, capturing of value for customers and other value recipients. To provide an overview that could be used to improve the existing model or completely alter it, there is need to Identify significant costs, assets needed and relating to each component of the business model. Accordingly, knowing how different business model components (cost drivers) affects costs and subsequently corporate performance in other components is a starting point for business model (Steinhilber, 2008). Therefore, the research will provide an essential foundation to enable meaningful cost analysis in strategic alliances planning and execution.

Another concept or term requiring definition is corporate performance. Strategic Alliances are created generally to enhance corporate performance. GEM (2004) defined performance as the act of performing; of doing something successfully; using knowledge as distinguished from merely possessing it. However, performance seems to be conceptualised, operationalised and measured in different ways thus making cross-comparison difficult. There are different corporate performance metrics. Types of performance metrics include those used to analyze business productivity, marketing and sales, financial performance, customer-relations management, and environmental metrics (Bushman, Indjejikian, and Smith, 1996). Performance measures used in previous studies are varied. They range from market share, return on assets (ROA), return on investment (ROI), return on sales (ROS) and sales growth. Such measures include subjective and objective, composite and individual measures (Dawes, 1999). Kaplan and Norton (1996) suggested that in developing metrics, collecting and analysing data, an organization should be viewed from four perspectives of the balance scorecard. This relate to learning and growth, business process, customer and the financial perspectives.

Strategic alliances are becoming more and more prominent in the global economy. According to Drucker (1996), the greatest change in corporate culture, and the way business is being conducted, is the accelerating growth of relationships based not on ownership, but on partnership (Drucker, 1996). He also observed that there is not just a surge in alliances but a worldwide restructuring of companies in the shape of alliances and partnerships. His views are endorsed by the fact that even a cursory search for strategic alliances in business dailies produces numerous press releases about companies forming alliances.

The number of strategic alliances has almost doubled in the past ten years and is expected to increase even more in the future (Booz, Allen and Hamilton, 1997). More than 20,000 corporate alliances have been formed worldwide over the past two years, and the number of alliances in the USA has grown by 25 per cent each year since 1987 (Farris, 1999).

According to a recent survey by Booz, Allen and Hamilton (2010), strategic alliances are spreading in every industry and are becoming an essential driver of superior growth. The number of alliances in the world is surging — for instance, more than 20,000 new alliances were formed in the U.S. between 1987 and 1992, compared with 5100 between 1980 and 1987 and 750 during the 1970s. The firm also predicts that within the next five years, the value of alliances is projected to range between $30 trillion to $50 trillion. The survey also reveals that more than 20% of the revenue generated from the top 2,000 U.S. and European companies now comes from alliances, with more predicted in the near future. These same companies also earned higher return on investment (ROl) and return on equity (ROE) on their alliances than from their core businesses. The report also concludes that leading edge alliance companies are creating a string of interconnected relationships, which allows them to overpower the competition (www.boozeallen.com).

Another survey published in Electronic Business showed that 80 percent of electronics companies have strategic alliances and most are planning or negotiating additional agreements (Vyas et al., 1995). According to a study conducted by Anderson Consulting, 82 percent of executives believe that alliances will be a prime vehicle for future growth (Kalmbach and Roussel, 1999). The study also predicts that within five years, strategic alliances will account for 16-25 percent of medium company value and 40 percent of the market value for about a quarter of the companies. This means that in five years, alliances will represent $25- $40 trillion in value (Kalmbach and Roussel, 1999).

The KPMG Africa Telecom Group (2012) reported the unprecedented growth in the telecommunications industry in Africa that is fuelled by rapidly changing technology, deregulation and convergence. The highest growth markets are outside core developed economies and Africa is now viewed as a growth target and no longer an emerging market. Mobile phones represent more than 90% of all telephonic communication in Africa. According to the KPMG report, market penetration passed the 50% mark in 2010, with subscriber growth slowing to around 15% per annum. However, several individual markets are still growing at 50% per annum or more and others stand at only single- digit penetration rates. The continent’s most advanced markets have passed the 100% penetration mark.

The introduction of prepaid services and a steady decline in tariffs has meant that more people can now afford a mobile phone. However, as lower income groups are being targeted, the declining Average revenue per user (ArPu) is putting pressure on the network operators’ profit margins. Telecommunications firms are faced with accelerating complexity competing on brand leadership, operating models, growth strategies, network synergies and footprints. Consumers increasingly demand enhanced converged services and operators are under pressure to be ready for change (KPMG 2012). The itnewsafrica.com listed the top ten-telecom companies in Africa based on the annual turnover. This is represented in the graph below:

Figure : List of top ten Africa's telecoms companies

Source: Author

When combined with an industry in transition from voice to data, the mobile market in Africa is far more complex compared to other industries. As new consumers come online and competition increases amongst providers, industry players are reaching out for expert support on the best strategies to drive growth (KPMG 2012). These corporate strategies include engagements in strategic alliances. Literature confirms that strategic alliances are an option for corporate growth (Elmuti and Kathawala 2001). The Coopers & Lybrand study rates growth strategies and entering new markets among the top reasons for forming strategic alliances (Coopers and Lybrand, 1997). As Ohmae (1992) points out: ``(companies) simply do not have the time to establish new markets one-by one''. In today's fast-paced world economy, this is increasingly true. Strategic alliances can provide growth quickly at a fraction of the cost of tackling the market alone or buying growth via acquisition. In the past it was more cost-effective to own all aspects of the value chain vertical integration was the business model of choice (corpchange.com, 2008). However, businesses still have challenges in managing costs in alliances, therefore, This research will investigate the nature of different costs and cost assumptions in managing business performance of strategic alliances in the telecommunications sector of Zambia.

Theory and Practice of strategic alliances

Strategic alliances are becoming an important form of business activity in many industries, particularly in view of global competition. Strategic alliances are not a panacea for every company and every situation. However, through strategic alliances, companies can improve their competitive positioning, gain entry to new markets, supplement critical skills, and share the risk and cost of major development projects (Išoraitė, 2009). Since alliances are a major cornerstone of strategy for many corporations, AMA (2007) contended the need for managers to understand the drivers for success, which includes cost management. The main purpose of the research is to utilise the current knowledge and literature on strategic alliances and cost management in proposing an alliance cost management model. This chapter critically reviews literature on the theory and practise of strategic alliances as follows:

Definition of strategic alliances,

The types and forms of strategic alliances,

The criteria for ascertaining what makes an alliance strategic

Reasons for entering into strategic alliances

Strategic Alliance and Strategy

Cooperation and Competition in Strategic Alliances

Theory of Alliances

Transaction Cost Theory

Agency Theory

Resource Based Theory

Inter-organisational Theory

Costing Theories

Strategic Alliances in Practice

Life Cycles of Strategic Alliances

Performance Metrics

Model Building Theories

Conclusion from Literature Review and Gap identified

Cost Management Model

What are Strategic Alliances?

"An alliance is a relationship that is strategic or tactical, and that is entered into for mutual benefit by two or more parties having compatible or complementary business interests and goals"

Segil, (1996)

The international business literature has already acknowledged a number of positive outcomes for companies actively engaged in strategic alliances, such as higher return on equity, better return on investment, and higher success rates, compared with integration through mergers and acquisitions, or companies in the Fortune 500 list that avoid building inter-corporate relationships (Booz-Allen & Hamilton, 1999). At the same time, O’Farrell & Wood, (1999) acknowledged the fact that there is little understanding among business executives regarding the formation processes, the dynamics and evolution of inter-corporate relations, and what are the factors that determine the success rate in strategic alliances.

There is no single definition for a strategic alliance. Ireland (2002) defines Strategic alliance, as is an agreement for cooperation among two or more organizations, which are about to improve their competitiveness and performance through the shared resources. In this inter-organizational cooperation two or more companies join their forces to follow the targets agreed upon, but remain independent (Kang and Sakai, 2000). In the same view, the partners’ pursuit of a long-term strategy expects a competitive advantage out of it (Keegan 2001

Technology Associates and Alliances (1999), suggests that alliances can be hybrids between these different types. For example, an R&D alliance may be a cross between a product and manufacturing alliance and a technology and know-how alliance, and a collaborative marketing agreement is a cross between a marketing and sales alliance and a product and manufacturing alliance. The important thing to remember is that there are various types of alliances, and they may range from simple licensing arrangement, ad hoc alliance, joint operations, joint venture, consortia, distribution, and value- chain partnership alliances to more complex hybrid alliances.

The Association of strategic alliances professionals (2008) categorises strategic alliances in four types namely joint venture, equity strategic alliance, non-equity strategic alliance, and global strategic alliances.

Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.

Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.

Non-equity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage.

Global Strategic Alliances working partnerships between companies (often more than two) across national boundaries and increasingly across industries, sometimes formed between company and a foreign government, or among companies and governments.

Another form of alliance is that of national economies forming regional integration blocs. According to Hans van Ginkel (2003), regional integration refers to the process by which states within a particular region increase their level of interaction with regard to economic, security, political, and also social and cultural issues. The objectives of the agreement could range from economic to political, although it has generally become a political economy initiative where commercial purposes are the means to achieve broader socio-political and security objectives. It could be organized either on a supranational or intergovernmental decision-making institution order, or a combination of both.

In summary, regional integration is the joining of individual states within a region into a larger whole. The degree of integration depends upon the willingness and commitment of independent sovereign states to share their sovereignty. Examples of regional economic communities are the European Union, CEMAC, COMESA, EAC, UAE and SADC, are some of the regional economic communities have that been formed. Zambia is a member of 44 international organisations; among them are COMESA, SADC, UN, WTO, and ACP to mention a few (zambiaonline.com). For the purpose of this study, this scope is limited to the study of business corporate entities.

Much of the discussion in the literature on strategic alliances revolves around alliances between two companies, but there is an increasing trend towards multi-company alliances. For instance, a six-company strategic alliance was formed between Apple, Sony, Motorola, Philips, AT&T and Matsushita to form General Magic Corporation to develop Telescript communications software (Coopers & Lybrand (1997).

For the purpose of this study, the scope of the alliances is limited to that one corporate alliance, i.e. private company to company or company to several companies.

The purpose of competitive advantage is not to retreat from competition, but to compete selectively from an advantageous strategic position. Porter (1980) defined three generic, competitive strategies, overall cost leadership, differentiation and focus. According to Langford and Male (1991) since the latter strategy can also employ cost leadership or differentiation, there are, in practice, only two major generic strategies i.e. cost or differentiation. A number of studies have addressed the concept of strategic alliance in manufacturing industries such as aerospace (Gugler, 1992), automobiles (Burgers, Hill and Chan, 1993) and Computers (Mohr and Spekman, 1994). Industry professionals and researchers indicate that the formation of strategic alliances between firms is becoming an increasingly common way for firms to find and maintain competitive advantage (Mohr and Spekman, 1994); and that the growth of alliances is a key to sustained competitive advantage for industry success (Gulati et al, 1994).

Research on strategic alliances has posited theories addressing the reasons why firms enter into closer business relationship. This includes efficiency creation through economies of scale specialisation and/or rationalisation (Lorange and Roos, 1993; Gugler, 1992), maximise use of facilities (Lindsay, 1989), complementary capabilities (Henricks, 1991), growth and improvement in competitiveness (Spekman and Sawhney, 1990), beat competitors (Roberts, 1992; Lindsay, 1989), spreading financial risk and sharing costs (Spekman and Sawhney, 1990), each predicting when strategic alliances will be formed. Such relationships can be found in many forms such as mergers and acquisitions (Nevaer and Deck, 1990), joint ventures (Kogut, 1988), license agreements and supplier arrangements (Borys and Jemison, 1989), networking (Buttery and Buttery, 1994), mentor/protégé (Thompson, 1993), partnering (Cowan, 1992) and alliances (Lei and Slocum , 1992).

Takac and Singh (1992) defined "alliances" as the joining of forces and resources between firms, for a specific or indefinite period, to achieve a common objective. They further explained that the term "strategic" provided an additional dimension to the definition. Such dimensional components require strategic issues to:

Have a futuristic vision

Have an impact on multi-functional or multi-business environments

Necessitate consideration of factors in the firm’s external environment.

As companies gain experience in building alliances, their portfolios expand with partnerships. While these partnerships may contribute value to the firm, not all alliances are in fact strategic to an organization (Wakeam, 2003). This is a critical point in strategy, since, as this study will show, those alliances that are truly strategic must be identified clearly and managed differently than more conventional business relationships.

Wakeam (2003) highlights five general criteria that differentiate strategic alliances from conventional alliances. The essential issue when developing a strategic alliance is to understand which of these criteria the other party views as strategic. An alliance meeting any one of these criteria is strategic and should be managed accordingly:

Critical to the success of a core business goal or objective.

Critical to the development or maintenance of a core competency or other source of competitive advantage.

Blocks a competitive threat.

Creates or maintains strategic choices for the firm.

Mitigates a significant risk to the business.

When an alliance is driven by intent to mitigate significant risk to an underlying business objective, the nature of the risk and its potential impact on the underlying business objective are the key determinants of whether or not it is truly strategic. Dual sourcing strategies for critical production components or processes are excellent examples of how risk mitigation can become the context for supply-side strategic alliances (Wakeam, 2003).

As process manufacturing companies advance the yield of their operations, suppliers often collaborate with the manufacturer to ensure their new products fit within its new operations. The benefits of such an alliance are cost savings to the manufacturer and accelerated product development for the supplier. In situations where the supplier’s product is critical to the manufacturer’s operation, it may be necessary for the manufacturer to have strategic alliances with two competing suppliers in order to mitigate such risks as unilateral cost increases or degradation in quality of service. The figure that follows shows pictorially the determinants of a strategic alliance.

Figure : Determinants of Strategic Value of an Alliance

Critical to the success of a core business goal or objective

Strategic Alliance

Conventional Alliance

Critical to the development or maintenance of a core competency or other source of competitive advantage

Blocks a competitive threat

Creates or maintains strategic choices for the firm

Mitigates a significant risk to the business

Source: Author (conceptualization based on Wakeam (2003) work on criteria of a strategic alliance)

The five strategic criteria outlined above are primary determinants of the strategic value of an alliance and will aid in the selection of the strategic alliances for the current study. Using these criteria to identify genuine strategic alliances in the portfolio today and as a guide for developing future strategic alliances are the first steps to improving the impact of an alliance organization. This cannot be achieved in isolation; leadership support and will are key towards improving the effectiveness of the strategic alliances.

Bleeke and Ernst (1993), summarise the generic needs of firms seeking alliance as cash, scale, skill, access or their combinations. Such motivational diversity characterizes alliance formation in many industries. The level of cooperation between business seems much less influenced by internalised costs and benefits than by the history of the partnering firms’ relationships, the current market positions of each firm and their joint resource capabilities. Dietrich, (1994) added that informational asymmetries relative to firms engaging in arm’s length market transactions did not have much influence. In other words, forming business networks and contractual or relational alliances is driven less by firms’ retrospective economic rationalities than by their strategic intentions. A decision to cooperate is not a responsive action, but fundamentally a strategic intent, which aims at improving the future circumstances for each individual firm in the alliance and their partnership as a whole.

Table : The factors leading to alliances

1970’s

1980’s

1990’s

Product performance

Position in the sector

Capability & competencies

Product using the most recent technologies

Construct position in the sector

Access to new opportunities through a constant flow of innovation

Marketing beyond national borders

Consolidation position in the sector

Anticipate rivals to maximize the creation of value

Sales based on product performance

Economies of scales and scope

Reduce total cost for the product or client segment

Acquiring advantages in responding to changing conditions and emerging opportunities

Source: adapted from Harbison and Pekar, (1998)

Regardless of the broad variety of definitions for strategic alliance, all have certain similarities (Spekman, 1998):

each has goals that are both compatible and directly related to the partner’s strategic in- tent;

each has the commitment of, and access to, the resources of its partners and;

each represents an opportunity for organisational learning.

While Todeva and Knoke (2005) identified several motive for entering in a strategic alliance as shown in the atable below:

Note: Elaborated from Agarwal and Ramaswami 1992; Auster 1994; Doz and Hamel 1999; Doz, Olk and Ring 2000; Harrigan 1988a; Hennart 1991; Lorange and Roos 1993; Zajac 1990

Ultimately, Todeva and Knoke (2005) grouped the variety of motives and drivers above into four distinctive levels as shown below:

Organisational - Learning / Competence Building - various kinds of learning and internalisation of tacit, collective and embedded skills; restructuring; improving performance; acquiring means of distribution; recreating and extending supply links in order to adjust to environmental changes; complementarity of goods and services to markets; legitimation

Economic – Market- Cost- & Risk related - market seeking; cost sharing and pooling of resources; risk reduction and risk diversification; obtaining economies of scale; co-specialisation

Strategic - Competition Shaping / pre-emption / Product & Technology related: achieving vertical integration; achieving competitive advantage; diversifying into new business; gaining access to new technology; converging technology; R&D; developing new products and technologies; co- operation with potential rivals or pre-emptying competitors; bandwagon effect and following industry trends

Political - Market development: developing technical standards; overcoming legal / regulatory barriers

Lorange and Roos (1993), postulated that a fundamental contrast between strategic and operational decisions is that the former are determined by perceived benefits from future activities while the later are based on transaction cost calculations. In this regard, strategic alliances challenge the neoclassical economic assumption of inter-firm competition, because they are driven not by direct impact on costs, profits, and other tangible benefits, but by potential of obtaining indirect positive outcomes from accumulated intangible assets and corporate social capital. They lock competitors in cooperative ventures where the partners share both risk and the benefits resulting from their collaboration. The transaction cost concept no longer provides a sufficient explanation of organisational behaviour because firms pay relational costs arising from all their joint efforts to build bridges to span the partnership’s uncertainties.

Alliances forms and structures vary with the firms’ market positions (for example, leader vs follower) and the strategic importance of collaborations within each parent firms’ portifolio (for example, core vs peripherals business) (Lorange and Roos, 1993). Firms tend zealously to protect their core business and are therefore more willing to enter into alliances involving peripheral activities that offer wide scope for organisational learning and less vulnerability from sharing confidential information.

Although the potential benefits of strategic alliances with large firms are significant, they can easily be offset by the costs and risks of such alliances (Kishida 2002). Alvarez (2001), for example, reports that almost 80% of managers from small firms felt unfairly exploited by their large firm partners and that many firms went bankrupt. Based on the work of Dunning (1998) on the motives and goal of strategic alliances, the logic behind the tremendous growth is summarized in the figure below:

Figure : Factors influencing the Growth of Strategic Alliances

Source: Based on Ghauri (1999), Narula & Dunning (1998)

Generally two or more companies collaborate to create a new product or a service in a strategic alliance. Ideally this new product or service will bring a unique value proposition to the market as agreed by the collaborating parties. The potential of strategic alliances’ strategy is enormous and if implemented correctly can dramatically improve an organization’s operations and competitiveness (Brucellaria, 1997). According to a survey conducted by Coopers & Lybrand, 54 percent of firms that formed alliances did so for joint marketing and promotional purposes (Coopers and Lybrand, 1997). Companies are also forming alliances to obtain technology, to gain access to specific markets, to reduce financial risk, to reduce political risk and to achieve or ensure competitive advantage (Wheelen and Hungar, 2000).

Despite increasing popularity of alliances, both management practitioners and scholars (Das and Rahman 2001; Seligman 2001) agree that most of them have failed to fully accomplish their goals. Inkpen and Ross (2001), for example, describe strategic alliances as unstable organisational forms. Hutt, Stafford, Walker and Reingen (2000) note that many strategic alliances fail to meet expectations because little attention is given to nurturing the close working relationships and interpersonal connections that unite the partnering organizations. Formal contracts generally play a necessary role in establishing the conditions and performance milestones for collaboration, which may even provide the only basis on which business partners are prepared to work together in the first instance. Yet such contracts are rarely enough by themselves (Child 2001).

The Coopers & Lybrand study rates growth strategies and entering new markets among the top reasons for forming strategic alliances (Coopers and Lybrand, 1997). Ohmae (1992) pointed out that companies simply do not have the time to establish new markets one by one. In today's fast-paced world economy, this is increasingly true. Therefore, forming an alliance with an existing company already in that marketplace is a very appealing alternative. Partnering with an international company can make the expansion into unfamiliar territory a lot easier and less stressful for a company. Anhueser-Busch licensed its right to brew and market Budweiser to other brewers such as Labatt in Canada, Modelo in Mexico, and Kirin in Japan, rather than buy a foreign company or build breweries of its own in other countries (Wheelen and Hungar, 2000). According to the Coopers & Lybrand (1997) study, 50 percent of firms involved in alliances market their goods and services internationally versus 30 percent of non allied participants.''

Another survey by the US’s Inter Company Marketing Group Survey Report (2010) concluded that of nearly 70 companies surveyed, 68% said that strategic alliances added to their revenue and another 4% said alliances replaced lost revenue. In over a third of surveyed companies, alliances contributed 30% or more of total revenue in the past three years. Almost 90% of respondents said strategic alliances would become more important over the next few years. (ICMG Report 2010)

The generic motive, to a greater extent, is to sustain long-term competitive advantage in a fast-changing world (Doz and Hamel 1998). For example, by reducing costs through economies of scale or more knowledge, boosting research and development efforts, increasing access to new technology, entering new markets, breathing life into slowing or stagnant markets, reducing cycle times, improving quality, or inhibiting competitors. Doz and Hamel (1998) grouped the primary purposes of an alliance into three: co-option, co-specialization, and learning and internalization.) Below is a snapshot of the 1000ventures pictorial presentation of strategic choice for a strategic alliance.

Figure : Strategic Choice for a Strategic Alliance

Strategic choices in corporate strategy (1000ventures.com, 2012)

In the current research, cooperation refers to a firm’s belief in a cooperative relationship with alliance partners to achieve its strategic goals as advocated by Baker, et al (1999). Competition refers to the extent to which a firm competes with alliance partners in resource and product markets (Oxley and Sampon 2004). Firms are motivated to seek partnerships to improve their performance; thus, cooperative intention establishes a foundation for strategic alliances. However, inter-firm competition cannot be totally and/or completely avoided in alliances (Hamel 1991; Hamel, Doz, and Pra- halad 1989; Khanna, Gulati, and Nohria 1998; Lado, Boyd, and Hanlon 1997; Larsson et al. 1998).

Early studies relevant to competition focus primarily on cooperative agreements between competitors, commonly known as horizontal alliances (e.g., Galaskiewicz 1985; Pfeffer and Nowak 1976); recent studies have shed light on competition more generally. Hence its presence is not limited to horizontal alliances but is also contained in any type of alliances (e.g., Luo 2007; Oxley and Sampson 2004; Walter, Lechner, and Kellermanns 2007). Larsson and colleagues (1998) acknowledge the good-partner fallacy and contend that in alliances, competition may be a productive form of inter-firm relationship. As firms face cooperation and competition simultaneously, studies examining either side provide a partial look at the reality of the situation. Therefore, alliances should be considered to include a mix of cooperation and competition (Wind and Mahajan 1997). In this regard, it is maintained that inter-firm cooperation and competition coexist in strategic alliances and both affect knowledge acquisition.

The strategic alliance is an inter-firm cooperative agreement. Khanna, Gulati, and Nohria (1998) posit that in an alliance, partners cooperate with each other because of their belief in common benefits. Such a cooperative belief encourages joint work, which enhances the sender’s willingness and flexibility to share its resources with the receiver. In this sense, knowledge becomes more available and accessible. Furthermore, the resource dependence perspective suggests that one firm becomes dependent on another because the former lacks key resources that the latter possesses (Inkpen and Beamish 1997; Pfeffer and Nowak 1976). Thus, a cooperative relationship can be derived from firms’ reliance on each other’s specific resources, and that reliance leads a focal firm to acquire knowledge from its partners.

Several authors have noted that the risk of opportunism and the difficulty in gaining commitment may be greatest when alliance partners are competitors. Hamel (1991), for example, has suggested that the rivalry between direct competitors may be the greatest deterrent to the alignment of strategic interests and commitment to the relationship. Deeds and Hill (1999) examine the risk of opportunistic behavior in research alliances and find that partners often take information learned from their partner and use that information to more effectively compete against their partner. Hamel and others (Lei and Slocum, 1992) suggest that direct competitors may have different motives, or intent, in forming the alliance. Hamel, Doz, and Prahalad (1989) assert that there is a high likelihood that partners in an alliance will benefit unequally and these asymmetric benefits are particularly problematic when alliances are between direct competitors. They contend that alliances between rivals can result in the loss of proprietary technology, lead to increased dependence of one partner on the other, or a strengthening of one partner’s competitive advantage at the expense of their one-time partner. Likewise, in a game-theoretic analysis, Wilfred and Staelin (2010) found that where there is an increase in inter-alliance competition, partners will decrease their investment in the focal alliance but increase their investment in competition outside the scope of the alliance.

Theory of Alliances

Several inter-organisational formations emerge when organisations search for new efficiencies and competitive advantages. The principal dimension is that, collaborating firms experience increasing integration and formalization in the governance of their inter-organisational relations. Alliances are recognised as hybrid organisational forms, or hybrid arrangements between firms that blend hierarchical and market elements (Auster, 1994; Olk 1999). Strategic alliances are not only trading partnerships that enhance the effectiveness of the participating firms’ competitive strategies by providing for mutual resources exchanges, e.g. resources like technologies, skills or product, but are also new business forms that enable the partners to enhance and control their business relationships in various ways (Todeva and Knoke 2005).

Figure : Theoretical Perspectives

Source: Author

There are several theories that pertain to strategic alliances. These are economic theories, Game theories and Inter-organisational theories. The current research is anchored on the resource-based theory but considers three other theories. These are:

Transaction cost theorise

Agency theory, and

Inter-organisational theory.

Transaction Costs Theory

Transaction cost economics assumes that business enterprises choose governance structures that economize transaction costs associated with establishing, monitoring, evaluating, and enforcing agreements (Williamson 1979; 1981). As per rule, predictions about the nature of the governance structure of organization will incorporate two behavioral assumptions: bounded rationality and opportunism (i.e., the avoidance of forbearance). These assumptions mean that the central problem to be solved by organizations is how to design governance structures that take advantage of bounded rationality while safeguarding against opportunism. To solve this problem, implicit and explicit contracts are established, monitored, enforced, evaluation and revised.

The theory has direct implications for understanding how alliances are used to minimize cost of the myriad implicit and explicit contracts between collaborative companies (Wright & McMahan, 1992; Chi & McGuire, 1985). Partners try to establish contractual relationships with each other to reduce their transaction costs. They find this process, however, easier to do vis-à-vis explicit, visible resources, than with invisible assets like competencies and knowledge.

Transactions cost theory suggests that firms entering into strategic alliances are potentially vulnerable to the opportunistic behaviors of their partners that impede achieving commitment (Hamel, Doz, and Prahalad, 1989; Reich and Mankin, 1986). Opportunistic behavior is defined here as those conscious deceitful behaviors engaged in by one party to the exchange that are meant to enhance their own position or outcomes, usually at the expense of the other party (Provan, 1993). Williamson (1975) refers to opportunism simply as "self-seeking with guile". These opportunistic actions may take the form of misrepresenting competences, limited commitment of resources to the alliance, holding specific investments by the partner hostage, appropriating private information, or premature exit from the relationship.

Transactions cost theorists propose that costly monitoring mechanisms and incentive systems originate as efficient responses to the problems of cooperation (Williamson, 1975). Partners may seek to erect economic constraints to that opportunistic behavior with the safeguards against the opportunistic behavior varying according to the nature of the exchange and relationship of the parties involved. Transaction cost economic view has recognized the proliferation of strategic alliances. The view further holds that economic weapons such as hostages and credible commitments to keep opportunistic behaviour in check may maintain them. Specifically, locking-in partners to a strategic alliance may use economic controls such as asset specificity, hostages, and reciprocal investments to reduce the potential for opportunism with commitment being in their own economic interest. Each of these controls involves costs to the alliance partners, reduces flexibility, and reduces the value otherwise created by the alliance.

Agency theory focuses on the contracts between a party (i.e., the principal) who delegates work to another (i.e. the agent) (Jensen and Mecklin 1976). Agency relations are problematic (Eisenhardt, 1989) in that:

(a) the principal and agent frequently have conflicting goals and

(b) it is difficult or expensive for the principal to monitor the agent’s performance.

Contracts are used to govern such relations. Efficient contracts align the goals of principals and agents at the lowest possible cost. Costs can arise from providing incentives and obtaining information (e.g., about the agent’s behaviour and/or the agent’s performance outcomes).

Agency theory appears to be particularly useful for understanding executive and managerial compensation practices, which are viewed as a means for aligning the interests of the owners of a firm (i.e., principals) with the managers in whom they vest control (Reuer and Miller, 1997). The theory is also useful in gaining insights into how partners can control the behaviours of the manager of the strategic alliance.

The resource-based theory of the firm blends concepts from organizational economics, strategic management and strategic human resource management (Schuler and Jackson, 1999). A fundamental assumption of this view is that organizations can be successful if they gain and maintain competitive advantage (Porter, 1985). Competitive advantage is gained by implementing a value-creating strategy that competitors cannot easily copy and sustain (Barney, 1991) and for which there are no ready substitutes. For competitive advantage to be gained, two conditions are needed: First, the resources available to competing firms must be variable among competitors, and second, these resources must be immobile (i.e., not easily obtained). Three types of resources associated with organizations are:

a) Physical (plant; technology and equipment; geographic location)

b) Human (employees’ experience and knowledge), and

c) Organizational (structure; systems for planning, learning, and monitoring; controlling activities; and social relations within the organization and between the organization and external constituencies).

Based on the resource-based theory, a number empirical studies have investigated various issues related to the strategic alliances such as the types of resources, their relationship to the alliance formation, and the relationship of the resources and the alliances with performance