The Structuring of Strategic Alliances in the ICT-Industry: A Modelling Approach Using Selected Organisational Theories

TABLE OF CONTENTS

LIST OF FIGURES

LIST OF TABLES

DECLARATION

ACKNOWLEDGEMENTS

ABSTRACT

1. INTRODUCTION

2. THEORETICAL BACKGROUND AND PREVIOUS WORK
2.1. Approach to Construct the Theoretical Framework
2.2. Definitions of Strategic Alliances
2.3. Classifications of Strategic Alliances
2.4. Review of Previous Work
2.5. Review of Theoretical Approaches
2.6. Theoretical Framework and Propositions For This Study

3. METHODOLOGY
3.1. Objective of the Survey
3.2. Unit of Analysis
3.3. Methods of Data Collection
3.4. Methods of Analysis

4. RESULTS
4.1. Findings of Univariate Analysis
4.2. Findings of Bivariate Analysis
4.3. Findings of Multivariate Analysis

5. DISCUSSION
5.1. Position of the Sample
5.2. Factors of the Governance Choice
5.3. The Explanatory Power of an Integrated Approach
5.4. Contributions and Implications

6. CONCLUSIONS

7. REFERENCES

8. APPENDICES

LIST OF FIGURES

Figure 1: Scope of Definitions of Strategic Alliances

Figure 2: Taxonomies of Strategic Alliances

Figure 3: Selected Classification of Strategic Alliances

Figure 4: Overview of Reviewed Theories

Figure 5: Model of Transaction Cost Theory

Figure 6: Classification of Resources by Das (2000)

Figure 7: Contingency Factors

Figure 8: Adaptation Cycle of the Structural Contingency Approach

Figure 9: Model of the Strategic Choice Theory

Figure 10: TCT-based Model

Figure 11: RBV-based Model

Figure 12: SCA-based Model

Figure 13: Scatter Plot of Standardised Residuals for Model 1

Figure 14: Scatter Plot of Standardised Residuals for Model 3

LIST OF TABLES

Table 1: Summary of Propositions

Table 2: Results of Bivariate Analysis

Table 3: Contingency Coefficients of Candidate Variables

Table 4: Model Ranking

Table 5: Parameter Estimates for Model 1

Table 6: Likelihood Ratio Tests for Model 1

Table 7: Pseudo R-Squares for Model 1

Table 8: Classification Table for Model 1

Table 9: Parameter Estimates for Model 3

Table 10: Likelihood Ratio Tests for Model 3

Table 11: Pseudo R-Squares for Model 3

Table 12: Classification Table for Model 3

DECLARATION

This dissertation is submitted as part of the Master of Arts in International Business programme at ESC Rennes, as validated by the Open University Validation Services, Great Britain. It has been carried out by the undersigned, and has neither been published nor submitted for a previous degree.

(Sascha G. Walter)

ACKNOWLEDGEMENTS

The author would like to thank Douglas Bryson, Steffen-James Conn, Morten Furseth, Heli Hartikainen, Renaud MacGilchrist, Marjaana Raty and Michael Ward for constructive suggestions, Jorg Walter for his support in collecting data, Elliott Gillespie, Caroline Hillyard, Till Jacobi, Andreas Popping, and Graham Wey for reviewing the final version of this paper, Mark Edwards (ReCap IT) and Matt Lewis (Archart) for kindly granting access to their databases, and the Tibet terrier Momo for giving the author company in many hours of work on this dissertation.

ABSTRACT

This study examines what factors determine the choice of governance structure made by alliance partners in the ICT-industry. First, the explanatory power of the transaction cost theory, the resource-based view, the structural contingency approach, strategic choice theory, resource dependence theory, organisational ecology and principal agent theory to answer this question is surveyed. A deeper analysis using transaction cost theory, resource-based view and structural contingency approach is employed to develop three models of alliance structuring. Propositions related to the models are then tested on a sample of 101 strategic alliances in the ICT-industry. The findings suggest that there exist five influential factors: (1) the existence of alliance-specific investment by the partners, (2) the number of functional areas contained by the alliance, (3) a limited duration of the alliance, (4) the type of resources contributed by the partners, and (5) uncertainty of the tasks of the alliance. These factors are then recombined to form one integrated model. The success of this approach and the usefulness of such a modelling approach in general are discussed alongside future directions for research.

1. INTRODUCTION

In the struggle for competitiveness, firms have increasingly turned to strategic alliances as a new competitive weapon. In 1999 alone, approximately 13,000 alliances in the e-commerce sector were announced internationally (Ernst et al., 2001). The rising popularity of such partnerships has led to a growing stream of research with theoretical roots in economics, corporate strategy and sociology. Key issues in the academic literature on alliances include: their formation, their dynamic evolution and performance, the performance consequences of partners entering alliances, and the choice of governance structures for alliances (Gulati, 1998).

Of late, more calls for in-depth research on alliance structuring have been made. On the one hand, a relative neglect towards this field has been pointed out by academics: “...little empirical work has been done relating circumstance to choice of appropriate alliance form” (Child and Faulkner, 1998:34) and “.mainstream economics has paid little attention to new forms of cooperative competition.” (Osborn and Hagedoorn, 1997:262). On the other hand, practitioners have underlined the importance of governance choices: “Make the tough calls on governance: A deal stands a greater chance of success if it establishes the right governance model.” (Ernst et al., 2001:99). A suitable governance structure is a necessary condition for the overall success of an alliance for several reasons. It creates a framework for the day-to­day management. It prescribes mechanisms to handle conflicts, contingencies and unforeseen events, and establishes property rights of assets and outcomes (Chan and Heide, 1993). It can give behavioural incentives to the involved parties e.g. by shared ownership, and determines the degree of interaction between the partners. It also impacts the external face of the alliance and can reflect the partners’ desire to create a representative body or to avert public disclosure of the co-operation. These considerations illustrate the importance of in-depth studies on the rationales behind the choice of alliance governance modes.

Prior research in this field initially drew on Williamson’s (1975) transaction cost theory (Gulati, 1998). Despite some valuable contributions of this approach, it could not cover the full complexity of alliance structuring due to several shortcomings (cf. Granovetter, 1985; Zajac and Olsen, 1993). Consequently, sources of explanations were sought starting from alternative theoretical bases. For instance, Osborn and Baughn (1990) employed the logic of transaction cost theory and corporate strategy to examine the influence of technological factors and the parent organisations’ size on the governance structure. Other combinations of approaches were applied e.g. to research the influence of the partners’ embeddedness in a social network (Gulati, 1993) or to determine the relationship between the governance choice and the anticipated costs of co-ordination (Gulati and Singh, 1998). After all, there are still theoretical approaches or combinations of approaches that are unapplied despite their potential to provide additional insights into the rationale of alliance structuring (Osborn and Hagedoorn, 1997).

The primary research problem addressed in this thesis is: What determines the choice of governance structure made by alliance partners in the ICT- industry? Why do partner companies from the ICT-industry select certain governance structures to organise their alliance?

Essentially, this research question is answered with several little used approaches from the field of organisational theory. On this foundation, three models of governance choice are constructed and falsifiable propositions are derived from their logic, which are tested on a sample of 101 alliances from the ICT-industry.^[1] The guiding idea is that the individual approach has little explanatory power, but the sum of several approaches has higher explanatory power, as illustrated by ‘Mintzberg’s Elephant’.^[2] Each can provide a different, partly complementary, partly competing, explanation of the governance choice. The spectrum of these explanations ranges from the complexity of the exchange between partners (transaction cost theory) via the type of resources contributed by partners (resource-based view) to external factors (structural contingency approach). To move towards a more synthesised and integrated view, as demanded by Osborn and Hagedoorn (1997), an attempt is made to form and test a joint model of the various factors proposed by the single theories (secondary research problem).

The research approach in this study is mostly deductive: a critical review and selection of organisational theories yields several explanatory factors for the form choice, which are ultimately integrated to form one model. This emphasis on a solid theoretical foundation distinguishes this thesis from other academic work: while elsewhere the underlying approaches might only mark out the analytical framework for the research (cf. Gulati, 1993), they are the main source of explanation in this thesis. Thus, the difficulties of the attempted operationalisation are accepted for the complementarities of the approaches. However, their reasoning is not blindly believed, but is in a final step contrasted against the realities of the studied ICT-industry.

With regards to the methodological approach to the research problem, secondary data from press reports serves as a data source for a sample of 101 alliances that were forged in the period from 1998 to 2002 and that involved at least one partner from the ICT-industry. The actual analysis draws on two techniques. Basically, propositions are tested using chi-square tests in combination with an inspection of the Cramer’s V statistic and contingency coefficients. Afterwards, the selection of a best-fitting joint model takes place by employing binary logistic regression.

Answering the research issue provides contributions that will be presented in Chapter 5.2. In summary, this research makes three actual contributions to the body of knowledge of alliance structuring. First, three models on alliances structuring are derived from classical organisational theories, including the in this context little used resource-based view and the structural contingency approach. Second, five factors with a significant effect on governance choices are identified. Third, an integrated model is generated by fitting these factors together and the general strengths and risks of such an approach are discussed.

This thesis is organised as follows. In Chapter 2 a brief overview of the variety of different definitions and classifications of strategic alliances is presented. After a review of several theoretical approaches with reference to organisational structures in general, a selection of three approaches is used to develop three models on the structuring of alliances. From these, eight testable propositions about factors influencing the governance structure choice are derived. Chapter 3 describes the data collection and analysis methods, whereas the results of the analysis are reported in Chapter 4. A critical discussion of the findings and the potential of an integrated approach follows in Chapter 5. Finally, the general conclusions are drawn in Chapter 6.

2. THEORETICAL BACKGROUND AND PREVIOUS WORK

2.1. Approach to Construct the Theoretical Framework

In the previous chapter, an introduction briefly stated and justified the research issues and methods pertinent to this study. On this ground, the thesis continues with a review of the body of knowledge in the field. Due to terminological confusion in the literature (Porter and Fuller, 1986; Osborn and Baughn, 1997) frequently used definitions and classifications of alliances are reviewed first. A clear terminology and taxonomy for this work is derived from that. Afterwards, a survey on general academic publications reflects the state-of-the-art in the field. To construct the theoretical framework of this work, theoretical approaches are reviewed and selected according to criteria described below. This selection is used to develop three models of governance choice, from which eight falsifiable propositions are derived.

A theoretical framework for the examination of alliance structuring can address different levels of analysis depending on the disciplinary base chosen. It can generally refer to the organisational level (organisational theories), the inter-personal level (sociology) and the intra-personal level (psychology) as units of analysis. Since this research is supposed to expand the present body of knowledge rather than producing isolated results, the in the field prevailing organisational theories are chosen as starting point (Poppo and Zenger, 1998). However, future research might provide additional insights by starting from alternative disciplinary bases.

A selection of approaches from the field of organisational theory must take place because an inclusion of all existing theories would exceed the scope of an MA-thesis and because the field of organisational theory is not characterised by one central paradigm (Lubritz, 1998). All selected theories are supposed to explain the governance mode choice. Therefore, two criteria are used for this selection: (1) the degree, to which the approach addresses alliance structuring, and (2) its popularity in academic literature as examined by Amalya (1998) in a network study of theoretical concepts in literature on inter-firm co-operation.

2.2. Definitions of Strategic Alliances

Strategic alliances have been defined in a variety of ways, which poses the danger of misunderstandings (Porter and Fuller, 1986) and complicates the comparison of research results (Mowery, 1992). Williamson’s (1975) market-hierarchy-dichotomy marks the boundaries of definitions, i.e. strategic alliances can be placed somewhere within the range from pure market exchange to internalisation (Figure 1). In a very broad definition, a strategic alliance can be regarded as “contractual agreement among firms to cooperate to obtain an objective without regard to the legal or organizational form the alliance takes” (Chan and Heide, 1993:9). Other authors narrow their definition down to exclude certain forms of co­operation. For instance, Dussauge and Garrette (1998) exclude mergers and acquisitions by pointing out that the partner firms have to retain their legal autonomy. Further, the long-term orientation of the inter-firm relation is used as a criterion to distinguish strategic alliances from licensing (Narula and Hagedoorn, 1999). Also the degree to which the agreement is codified makes a difference in definitions. While some authors include handshake agreements, others understand only codified, i.e. written agreements, as alliances.

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Figure 1: Scope of Definitions of Strategic Alliances

Many definitions commonly state that an alliance is understood as an inter-firm linkage in which two or more firms establish a relationship and contribute or exchange either tangible or
intangible resources (Lu, 1995). For the purpose of this thesis, a strategic alliance will be defined as a contractual agreement with or without equity commitment, between at least two economically independent firms that exchange tangible and/or intangible resources over several distinct transaction periods to pursue common goals. A firm is considered as economically independent when a formal possible exit from the co-operation would not endanger its economic existence (Schneider, 1973). Thus, mergers and acquisitions, subsidiaries and franchises are excluded by this definition of strategic alliances.

2.3. Classifications of Strategic Alliances

Several taxonomies of strategic alliances have been developed in prior work (Figure 2). Some authors classify alliances according to their level of equity sharing and hierarchical controls. In a broad view, just two categories, ‘equity and non-equity arrangement’, were developed (Hagedoorn and Narula, 1996), whereas a finer perspective also integrated intermediate forms such as agreements involving equity exchanges (Gulati, 1998; Mockler, 2000). In other studies, the areas of functional concern such as R&D or marketing were used as primary classification criteria (Ghemawat, Porter and Rawlinson, 1986) or as a secondary criterion after the equity level (Narula and Hagedoorn, 1999).

Figure 2: Taxonomies of Strategic Alliances

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According to the type of joint activities, alliances can be categorised into ‘vertical’ and ‘horizontal’ alliances (James and Weidenbaum, 1993). The first involves co-operation within the same activity such as joint research and development (R&D), while the second refers to co-operation in complementary activities such as production and marketing. Regarding the type of contributed capabilities, Dussauge, Garrette and Mitchell (2000) differentiated ‘link alliances’ and ‘scale alliances’. In the former the partners provide different capabilities, whereas similar capabilities are contributed in the latter.

Boris and Jeminson (1989) adjusted Thompson’s (1967) technological interdependence concept to characterise alliances, which they named hybrids. Hybrids with ‘pooled interdependence’ are those where the partners draw resources from a common pool, whereas ‘sequential interdependence’ means that one partner hands resources over to the other. In ‘reciprocally interdependent’ hybrids, the partners exchange outputs and learn from each other. Furthermore, Child and Faulkner (1998) introduced multiple criteria. They categorised alliances referring to the number of partners, the scope of the alliance (complex to focused) and the corporate identity (loose collaboration to joint venture).

In this study four distinct forms of alliances will be distinguished according to the level of shared equity and the technological inter-dependence: (1) unilateral contracts, (2) bilateral contracts, (3) minority equity alliances and (4) joint ventures. They can be differentiated similar to Das (2000) and Gulati and Singh (1998) in the following way (Figure 3):

Bilateral contracts refer to inter-firm collaboration contracts without the sharing or exchange of equity. The partners put in resources and work together on a continual basis directly from their own organisational confines. Hierarchical elements are few if any and do not occur on a systematic basis. New decisions are negotiated by the partners and the contracts are usually incomplete. In contrast, the key feature of unilateral contracts is that the individual firms carry out their obligations independently of others, as exemplified by the ‘technology for cash’ exchange in licenses. Such contracts tend to be complete and specific, and partners are expected to perform on their own without much co-ordination or collaboration. Thus, the level of integration is relatively low in alliances based on unilateral contracts.

Figure 3: Selected Classification of Strategic Alliances

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Minority equity alliances encompass partnerships in which no new entity is created. Instead, one partner, or a set of partners, takes a minority equity position in another. The degree of hierarchical control is between that in joint ventures and contracts, and is typically realised by the investing partner joining the board of directors of the partner that received the investment. This ensures that the investor has some form of command and authority system through the participation in the partner’s board. A concern for the value of its equity provides appropriate incentives for the investor. Moreover, disputes are easier to resolve by interaction on board level, but standard operating procedures are not necessarily given. The board representation also creates a forum for information exchange and common decision-making by the partners on a regular basis. Beyond interaction at the board level, day-to-day activities are jointly co­ordinated and negotiated on an ongoing basis.

The last form, joint ventures, occurs when partners create an autonomous entity in which each owns a portion of the equity. In such alliances a separate management team is in charge of the day-to-day business, which provides an independent command structure and authority system with defined rules and responsibilities for each partner. Concerns about the value of their own equity serve as incentives for each partner. Furthermore, pricing discussions are internalised by the joint venture, which controls the in- and outflow of resources to and from the partners. As part of creating such an entity partner firms also typically put in place standard operating systems and dispute resolution procedures. Thus, the hierarchical control is high in joint ventures (Gulati and Singh, 1998).

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^[1] See Appendix D for definition.

^[2] Mintzberg, Ahlstrand and Lampel (1998) used an anecdote by John Godfrey Saxe (1816-1887) to illustrate the interplay of different theories. In it, blind people touch an elephant at different spots. Though each has a different impression, all refer to the same animal, and the sum of their impressions creates a more comprehensive picture of the elephant.